When Shaggy has difficulty trying torelax the gang travels to a remote town to stay at the La Serena Spa. There, they meet Mr. Hubley who works there. Shaggy asks if there is anything to eat, and Hubley says no, but there is a barbecue in town.
The gang goes to the barbecue, and all but Shaggy and Scooby-Doo go off to see the paleontological dig of Professor Svankmajor. Shaggy and Scooby are too full to walk right away. When they set out, a gila monster steals a biscuit from them, causing Scooby to go after it. He meets the Phantosaur (described as resembling an Appalachiosaurus by Professor Svankmajor) and runs away. Later, Shaggy and Scooby are chased by the Phantosaur and narrowly escape.
Meanwhile, Professor Svankmajor shows the rest of the gang over the dig, and Velma meets Svankmajor's student, Winsor. She instantly sees him as a soul mate and they plan to go out on a date, to which Fred replies to Daphne,"On our own for clue searching then."
Back at the spa, Shaggy is in terrible shape after a fright. Mr. Hubley helps with aromatherapy, assisted by Scooby-Doo adding a Scooby Snack to the aromas. Shaggy becomes more calm, but freaks out again when Mr. Hubley tells them the legend of the Phantosaur. The legend says the Phantosaur was summoned by Native Americans to drive out Spanish conquistadors, but it turned on them instead.
Hubley has an advanced hypnosis machine with a hologram projector. He hypnotizes Shaggy to become fearless and unstoppable when he heard the word "bad," and to switch back to normal when he hears it again. Then he orders Shaggy to forget everything; unfortunately, Hubley himself is affected by the hypnosis and he can't remember the key word for Shaggy.
Daphne, Fred, and Velma go back to the dig to look for clues, but Velma is so lovestruck that she's not much use. She misses an obvious clue about many footprints going to a part of the cave where Winsor says they never go.
Meanwhile, Scooby and Shaggy go to an all-you-can-eat restaurant and start to eat it out of business. Then a biker gang comes in. Shaggy accidentally squirts the contents of a hot dog bun on one of the bikers, who grabs him and says something about how he's going to get hurt "bad." Suddenly Shaggy is fearless. He knocks all of them out. Then the gang leader, Tex, arrives and challenges him to a motorcycle race on Dead Man's curve. Shaggy confidently accepts, even though he's never ridden a motorcycle before. As Tex leaves, he says he won't kill Shaggy "bad." Then, Vincent told Tex that if he does, he will get got (catch phrase from R-Truth. Suddenly back to normal, Shaggy is terrified of the challenge he just accepted. Meanwhile, Randy warns the girls to pass it on.
That night, Daphne decides to give him motorcycling lessons, because she drove a motorcycle when she was five. Shaggy and Tex have a motorcycle race, and Shaggy hears "bad" just in time and almost wins, until a Phantosaur shows up and he thinks in his mind that the monster must think it's so "bad," which is enough to make him cowardly again and get chased.
Eventually, they figure out that there were two phantosaurs and they were robots. The culprits were two mining engineers who wanted the silver they found in the area, which they couldn't get to because of the paleontologists.
Once back at Hubley's they find the hologram projector gone and they get attacked by a pack of Velociraptor and a ghostly fire-breathing Tyrannosaurus. They learn that it was Professor Svankmajor and Winsor, much to Velma's dismay. They had found a complete Allosaurus encased in quartz crystal, a beautiful and priceless find, and they wanted to keep it for themselves. They wanted to scare everyone off so they could dig it out and take it away. They disguised three other graduate students in velociraptor costumes, and created an original red Phantosaur with an advanced holgraphic projector (stolen from Hubley's hypnotism room) and paint-stripper devices that blasted super-heated air for the fire effects.
While they are underground, the dynamite charges Svankmajor set to blast free the dinosaur crystal go off (because Daphne left a paint-stripper on and the heat lit the fuses). Shaggy's hypnotic bravery comes in again, until Daphne praises him that he's "not bad." Scooby realizes the keyword but is unable to tell the rest of the gang (who misunderstand his "rad" as other words). Shaggy has to complete the rest of the escape on sheer guts, and with some help from his new biker friends. Svankmajor and Winsor are arrested, but Velma says she will date Winsor again when he gets out of jail.
They then go back to La Serena Spa and Mr. Hubley tries to un-hypnotize Shaggy, accidentally making the entire gang into Shaggy. The end of the movie shows them driving away in the "Mustard" Machine.