In Neo-Gotham City, the Joker mysteriously resurfaces after having disappeared 35 years ago, taking over a faction of the criminal gang Jokerz. On his orders, they steal high-tech communications equipment. Despite the intervention of Terry McGinnis (Bruce Wayne's successor as Batman), the Joker escapes. Bruce insists that the Joker must be an impostor, claiming to have witnessed the Joker's death after their last battle. Unwilling to let Terry face the Joker - impostor or not - Bruce demands that he return the Batsuit, to which he reluctantly complies. Later, Terry and his girlfriend Dana are attacked by the Jokerz at a nightclub. At the same time, the Joker ambushes and attacks Bruce in the Batcave, leaving him for dead. Terry defeats the Jokerz, and Dana is taken to the hospital for her injuries. Terry rushes to Wayne Manor, and finds Bruce near-dead from the Joker's trademark toxin . Terry quickly administers an antidote, and tends to Bruce with the help of Barbara Gordon.

At Terry's insistence, Barbara reluctantly tells him what really happened to the Joker. Decades earlier, after Nightwing(Dick Grayson) moved to the adjoining city of Blüdhaven to fight crime on his own, the Joker and Harley Quinn kidnapped Tim Drake, Dick's successor as Robin, disfigured him to look like the Joker, and tortured him for three weeks, at which point Tim revealed Batman's secrets. During the final battle, although the Joker attempted to make Tim kill Batman, Tim turned on the Joker and killed him before suffering a mental breakdown. Batman and Batgirl buried the Joker's body in a mineshaft deep beneath Arkham Asylum, while Harley fell into a pit while fighting Batgirl and was presumed dead. One year after the incident, Tim was successfully rehabilitated, but Bruce forbade Tim from being Robin again, blaming himself for what happened and vowing to never again endanger another young partner. Tim eventually settled down with a wife and family and now has a career as a communications engineer.

Terry decides to question Tim, who denies any involvement and bitterly says he had grown sick of his past life as Robin. Terry then suspects Wayne Enterprises' operations manager Jordan Pryce, who would have taken control of the company were it not for Bruce's return. Terry finds the Jokerz with Pryce on Pryce's yacht, who reveal that Pryce had hired them and given them access codes. However, the Joker has sent them to kill Pryce, as he is no longer needed. Terry rescues Pryce before a laser blast destroys the boat, and then turns him in to the police with a recording of Pryce's conversation with the Jokerz.

Back in the Batcave, Terry deduces that Tim must be working with the Joker when he discovers that the high-tech equipment the Jokerz have been stealing can be combined to form a machine that takes control of any satellite, even an orbiting military satellite with an automated defense system and fire it at will, thus explaining what happened on the yacht - and it can only be built by an engineer of Tim's caliber. Although skeptical, Bruce sends Terry to question Tim. The Joker, who confirms that he and Tim are indeed working together, lures Terry into a trap.

After escaping, Terry tracks the Joker to the abandoned Jolly Jack Candy Factory. After fighting off the Jokerz, he finds Tim, who transforms into the Joker before his eyes. When the Joker kidnapped Tim, he secretly implanted a microchip built from cutting-edge genetics technology (revealed later to have been stolen from Project Cadmus) into Tim's brain. The chip carries the Joker's consciousness and genetic material, allowing him to transform Tim into a clone of him at will, eventually becoming strong enough to permanently control his body. The Joker prepares to fire the satellite to kill Terry's girlfriend Dana Tan, his family and Bruce before destroying the city, but Terry sets Bruce's dog, Ace, on him. Terry knocks the Joker's joy buzzer into the controls, destroying the beam's guidance system and causing it to head to the factory.

The Joker attempts to escape, but Terry seals the factory. The two fight, but the Joker is a formidable opponent since he has extensive knowledge of Bruce's tactics as Batman. Terry improvises by using his own street fighting maneuvers and taunting the Joker's obsession with Bruce, sending the villain into a fury to put him off balance. The Joker manages to pin Terry to the ground and begins to strangle him. However, having covertly retrieved the Joker's joy buzzer, Terry delivers a shock to the Joker's neck, destroying the chip and reverting Tim to his old self, and destroying the Joker forever. Terry escapes with Tim and Ace before the satellite destroys the factory and the satellite-jamming device. The satellite is deactivated and floats into outer space.

In the city jail, the female twin members of the Jokerz are bailed out by their grandmother, an elderly Harley Quinn, who is apparently reformed. Later, while visiting Tim in the hospital to reconcile, Bruce acknowledges to Terry that he is worthy of the mantle of Batman. The film ends with Terry donning the Batsuit and flying off into the heart of the city.