The movie opens with a montage showing Emperor Han's (Jet Li) rise to power in ancient China, and how in his quest for immortality, he sent his most trusted servant, General Ming, to seek out sorceress Zi Juan, purported to know the secret of eternal life. Zi Juan (Michelle Yeoh) agrees to help him in return for being granted a reward. As per the Emperor's decree, no one was to touch the sorceress during her task for she was to belong to the Emperor and him alone. General Ming and the sorceress, however, soon fell for each other and got involved. Unbeknownst to them, a spy reported this to the Emperor and after Zi Juan recites a spell from a mystic book that would make him supposedly immortal, he had General Ming torn limb from limb by four horses in front of her as her "reward" before stabbing the sorceress with a dagger himself (important later). Only then was the sorceress's cunning revealed, for she already expected his foul play and instead of granting the Emperor eternal life, Zi Juan instead placed a curse upon him and his entire army. The sorceress fled as they turned to clay, never again to be awakened lest a terrible menace befall all of mankind that no one man would able to prevent.
Flash forward to the 1940's, when a grown up Alex O'Connell (Luke Ford) is heading an excavation in China mentored by scholar Roger Wilson, looking for the tomb of Emperor Han. They do find it, but the tomb's (very cool) booby traps claim the lives of several expedition members, and while exploring the Emperor's funerary chariot, Alex is attacked and nearly killed by female assassin Lin (Isabella Leong) only to be saved by Roger in the nick of time. Meanwhile, in their quaint estate in England, Rick (Brendan Fraser) and Evelyn O'Connell (Maria Bello) are getting bored out of their minds trying to adjust to a life without any sense of adventure whatsoever (very funny scenes here). Evy is having trouble coming up with the proper inspiration for the third book in her series of semi-autobiographical novels describing the O'Connells' repeated brush-ins with Imhotep, but even Rick's attempts at "inspiring" her are to no avail. They also resent the fact that their son Alex is practically a stranger who only shows up in their Christmas photos, and so when an opportunity presents itself for them to courier a valuable item called the Eye of Shangri-la to Shanghai, they both take it without a second thought. In Shanghai, Rick and Evy rendezvous with her brother Jonathan (John Hannah) and Alex after saving him from picking a bar fight over a woman with Rick's old French Legion comrade, "Mad Dog" Maguire. Both Rick and Evy were led to believe Alex was studying in college while he was actually leading the excavation, and are understandably a bit upset to learn otherwise.
Alex takes his parents to have a look at Emperor Han's terracotta statue he just unearthed, and while there, they are betrayed and held at gunpoint by Roger Wilson, who has been secretly aiding a small group of Chinese military men bent on resurrecting Emperor Han. The Eye of Shangri-la actually contains the potion of eternal life taken from the fountain itself in the legendary lost city in the Himalayas, and once it touches the corpse of Emperor Han, it will bring him back to life. Alex and the assassin, Lin, who means to not let this happen at any cost and has with her the dagger used by the Emperor to stab the sorceress Zi Juan all those centuries back, nearly save the day but Lin is fooled by a decoy placed inside the ceremonial sarcophagus and the Emperor is reborn anyway in terracotta form with power over the five elements including fire, which he uses to great effect throughout the movie. After decapitating Roger with his bare hands and somewhat hesitatingly accepting the help of the Chinese military general (since his last general had betrayed him), the Emperor takes off on his supernatural horse-drawn chariot and a chase ensues through the streets of Shanghai involving Rick commandeering a car to hunt down yet another mummy on the loose, several boxes of fireworks going off and Alex hitching a ride on the chariot despite Rick's protests to try to stab the dagger into the Emperor's heart as per Lin's instructions, as that is the only thing that will kill him for good, all while the chariot and the car weave in and out of traffic with each vehicle's occupants shooting at each other relentlessly. At one point during the chase, the Eye of Shangri-la turns into a diamond.
The Emperor gets away and plans to place that diamond atop a golden tower in a courtyard far out in the Himalayas to guide his way to Shangri-la, where he will obtain his coveted immortality. The O'Connells and Lin join forces to stop him after recovering from a major fireworks explosion at the end of the car chase (VERY funny), and make it to mountains on "Mad Dog" Maguire's airplane... without any seatbelts and with a motion sick yak on board that throws up all over Jonathan at one point (very funny and gross too). They camp out in the little snowy courtyard waiting for the arrival of Emperor Han and his Chinese military henchmen. After some banter between Alex and Rick about which guns to use, basically what passes between father-son bonding in the O'Connell family, a firefight ensues between them and the soldiers. Lin summons three Yeti to help against the overwhelming numbers, and they make short work of the Chinese military and even score a field goal with one of them (you'll have to see it to believe it). Emperor Han, meanwhile, manages to reach the top of the tower and place the diamond there to learn the way to Shangri-la, despite Rick, Alex, Jonathan and even the Yetis' best efforts. Han is about to stab Alex with his sword when Rick gets in the way and is mortally wounded. The Emperor then buries everyone under a massive avalanche to prevent them from following. However, the Yetis shield the O'Connells from the avalanche with their bodies and afterwards take them to a cave at the entrance to Shangri-la, where Zi Juan, now an immortal who is revealed to be the also-immortal Lin's mother, keeps watch over the fountain of youth aided by the three Yetis who'd rescued her from death two thousand years ago.
Rick is saved by the fountain's waters and has a romantic moment with Evy, while Alex finds out that the girl who he'd been getting a crush on ever since she helped rescue his parents at the museum is actually two thousand years old, which naturally makes him a bit confused but determined to be with her nonetheless, even with all of Evy's fuss over the matter. The Emperor arrives in the meantime and manages to bathe in the fountain, reaching full immortality. He transforms into a huge three-headed dragon, snatches Lin in his claws and flies off toward his original burial place to summon his army which, after crossing the Great Wall of China, built as a symbol of Han's ruthless power, will also become immortal. The O'Connells and Zi Juan give chase in Maguire's airplane and reach a barren field where Zi Juan summons all the slaves and captured enemy soldiers who died while working to build the Wall back to life so that they can help defeat Han's army. This includes General Ming, Lin's father, who spearheads the army of "good undead guys" (as Rick puts it). A massive battle ensues between both sides that includes Alex rescuing Lin from the Chinese military camp, Maguire arriving with aerial reinforcements that mow down the terracotta soldiers with machine gun fire, the Emperor resorting to his dragon form and a traditional Chinese horned beast form to take out huge chunks of the slave army, and Rick and Evy fighting side by side against mummies just like in the good old days before Alex and Lin rescue them from the overwhelming numbers in sidecars commandeered from the Chinese soldiers. At one point, Han faces off with Zi Juan in a very nicely choreographed battle and finally kills her, since she had given her immortality and her daughter's in exchange for summoning the workers back from the dead, but not before she manages to steal the dagger from his belt and pass it on to Lin.
The Emperor moves to stop the battle by restoring his opponents to their resting place but the O'Connells intervene. Evy and Lin get busy with the Chinese general, who is eventually crushed, alongside his loyal aide, by machinery in the chamber they're all fighting in (Han's tomb). Meanwhile, Alex challenges the Emperor but is badly beaten since Han is a bit of a dirty fighter, and a combination of martial arts plus his supernatural transformations make him a fearsome opponent. Rick intervenes, daring him to stop using his tricks and fight like a man. Rick and the Emperor engage in a brutal, bloody battle that eventually has both O'Connells putting their "divide and conquer" strategy into motion by driving the two halves of the now broken dagger into his heart from the front and back. The blade meets in the middle and causes the Emperor to self-destruct in an explosion of molten clay. His army dissolves to dust and is swept away by the wind, as is the army led by General Ming after proclaiming their victory.
Some time after this, Alex and Lin are now a happy couple dancing away romantically in Jonathan's nightclub in Shanghai, as are Rick and Evy. Jonathan leaves Maguire in charge of his business and, with the diamond from the Eye of Shangri-la that he managed to retrieve just before the avalanche buried him back in the Himalayas, plans to retire to somewhere in the world where there are no mummies so he can finally live in peace.
He picks Peru. As his private limo drives off, we are informed by a title card that mummies would soon be discovered there.
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