NOTE: This great spoiler was sent in by Squirk.
The film starts out in 1585, recapping what's been going on since Elizabeth assumed her role as The Virgin Queen. England is almost broke, and ill-prepared to defend herself against a major attack from abroad. Elizabeth is still hated by the Roman Catholic Church and particularly by King Phillip of Spain, a devout Catholic who wishes to place his daughter Isabella on the English throne. Half of her subjects are Catholic but, despite advice to the contrary, Elizabeth chooses not to punish any of her people solely because of their beliefs. They will be held accountable only for their deeds.
Still advised by an ailing Sir Francis Walsingham, Elizabeth makes a public display of seeking a husband of royal lineage to produce a male heir to the throne and help refill the country's coffers. This is mostly pretense, as Elizabeth does not wish to be beholden to any man, nor does she wish to relinquish her iconic status as The Virgin Queen. As such, none of her would-be suitors interest her, though she is not unkind in her rejection.
Elizabeth also has a cousin - Mary Stuart, Queen of Scots - who is being held captive in a castle, much similar to how Elizabeth was imprisoned in the first film. Mary is a devout Catholic and believes, along with the Vatican and most of the world's Catholics, that she is the rightful heir to the throne, instead of her bastard cousin. Mary has confederates within England who await her command to assassinate Elizabeth.
One day at court, Elizabeth deigns to receive Walter Raleigh, an explorer who has traveled to the New World, and brings back heretofore unseen treasure such as potatoes and tobacco. Apparently, Raleigh is also a bit of a pirate, as he also delivers to Elizabeth, under protest from the Spanish ambassador, booty stolen from Spanish merchant vessels. Raleigh requests that The Queen provide him the funds to make a second venture to the New World. Elizabeth is intrigued by Raleigh's straightforward manner, and tables her decision until she can learn more about him. She sends her favorite courtier Bess to speak with Raleigh and gather more information. When Raleigh asks Bess the best way to win The Queen's favor, Bess tells him to speak to her plainly, like he would to any other person, instead of the empty flattery The Queen hears day in and day out.
Raleigh later meets The Queen again in her chambers and softly and lovingly describes the wonder of discovering the New World. His words move Elizabeth to the point of tears. She is drawn to Raleigh, and thoroughly enjoys the time they spend together, As such, she is reluctant to fund a voyage that will take him away for several years. Elizabeth and Bess, when alone together, rhapsodize about how different Raleigh is from other men. The Queen tells Bess that she, Bess, is the Queen's adventurer by proxy - that is, Bess can enjoy all of the things in life that Elizabeth cannot have (i.e., love, marriage, children, moving to the New World), and the Queen must enjoy it all vicariously.
Meanwhile, King Phillip has received permission from The Vatican to begin "The Enterprise of England", a plot to usurp Elizabeth and place Phillip's daughter on the English throne. Part of this conspiracy is Walsingham's beloved younger brother William. Also, Bess, as it turns out, has an uncle and a cousin who are both Catholics, loyal to the Pope, and as such have fallen out of favor with The Queen's court. Her cousin begs Bess to help him regain favor with The Queen, even offering to give up his Catholic faith to do so. Bess refuses.
Unbeknownst to Bess, she has been followed by Walsingham and his agents when she visits her cousin. Apparently, both uncle and cousin have been passing on messages from Mary Stuart to her allies, led by Robert Reston. Walsingham has the two men arrested and tortured until they give up some sketchy details on The Enterprise of England. Although the men don't seem to be involved in the plot, their knowledge alone is enough to have them summarily hanged, much to Bess' distress.
Bess blames herself for not doing more to help her cousin, and is comforted by Raleigh. The two kiss, and begin a long affair which they think the Queen knows nothing about. They're wrong - Elizabeth knows, and is wrought with both jealousy and betrayal, even though as Queen, she could never have Raleigh anyway. However, out of affinity for either Bess or Raleigh or both, Elizabeth never lets on that she knows. Eventually, however, Bess gets pregnant with Raleigh's child, and the couple secretly marry. When Elizabeth finds out, she is furious, banishing Bess from the Court and having Raleigh arrested.
Mary Stuart decides that the time has come to assassinate Elizabeth and bring The Enterprise of England to fruition. She sends a message to Reston, who gives a pistol to one of his accomplices and orders him to shoot the Queen. However, when the would-be assassin fires the pistol mere feet from the Queen, she is unharmed. Turns out there was no bullet in the pistol. Walsingham cannot deduce why Reston staged a fake assassination attempt; however, Walsingham does discover the assassination was ordered by Mary Stuart, and has her arrested for high treason. Walsingham also uncovers the involvement of William, but, out of brotherly love, uncharacteristically spares his life.
Walsingham strongly encourages Elizabeth to sign the order to execute Mary Stuart, which the Queen does with great reluctance. Elizabeth is nagged by fears that openly executing Mary will send a message that royalty is no longer untouchable; such a sea change would have drastic consequences for the world, she worries. Elizabeth makes a weak attempt to stop the execution, but Mary is beheaded nonetheless.
This is where the shit hits the fan. Turns out that Mary Stuart was just a pawn. The Enterprise of England was never intended to be a straightforward assassination attempt, as that would tend to martyr Elizabeth and bolster England's resistance to Catholic influence. Instead, King Phillip and Reston tricked Mary into ordering the assassination, then made sure it did not succeed, so that Elizabeth would have Mary killed as a traitor. Turns out Elizabeth was right to worry about the ramifications of killing Mary. King Phillip, a God-fearing man, would never declare all-out war without justification. The execution of a righteous and virtuous Catholic princess and royal heir by a bastard heretic usurping Queen gave Phillip's conscience all the justification it needed to unleash the full force of the Spanish armada on England.
Everyone's freaking. The English navy is vastly outnumbered by the Spaniards, and no other country will provide assistance. Elizabeth orders all prisoners released, including Raleigh, in hopes that they will all stand and fight for their country. Elizabeth travels to the coast of the English channel, where the deciding naval battle will be fought. She dons gleaming armor alongside her soldiers, and gives a stirring Braveheart-esque speech on defending the honor of England, even when faced with overwhelming odds.
The battle is waged, and England is both outnumbered and outgunned, making little headway in stopping the Spanish fleet's advance. Raleigh and the other ship captains resort to "fire ships" - basically, they douse their ships in oil, set them on fire, and send them crashing into as many Spanish ships as possible. The tactic doesn't work well at first, only taking out a handful of ships. However, a portentous and unexpected storm sweeps into the Channel, forcing the Spanish fleet to drop anchor, lest they get blown straight into the rocky shoreline and smashed to bits. The Spanish ships, being immobilized, are now sitting ducks for the fire ships. Elizabeth awakens early the following morning to find most, if not all, of the Spanish fleet in flames. Spain is defeated and disgraced. England wins.
Epilogue - Bess and Raleigh have a son, who The Queen goes to meet. All is forgiven, and Raleigh intends to return to the New World once again with the Queen's blessing. Phillip drives Spain into bankruptcy. Elizabeth reaffirms her lonely but necessary role as mother and protector of England, and the country enters a unprecedented era of peace and prosperity.