Noted for portraying characters with vast sex appeal, she often appears in magazine lists of "Most Beautiful" and "Sexiest" women. Graham is a public advocate for Children International, and supported the climate change campaign Global Cool in 2007.
Graham was born in Milwaukee, Wisconsin, at St. Michaels Hospital, the older of two children. Her family is of "three-quarters Irish" descent, with her father's side from County Cork. Her younger sister, Aimee Graham, is also an actress, and writer. Their mother, Joan (née Bransfield), is a teacher and author of children's books. Their father, James Graham, is a retired FBI agent. The girls were raised Catholic. Her family relocated repeatedly before moving to Agoura Hills, California, when she was 9 years old. She was introduced to acting during a school production of The Wizard of Oz.
After high school, Graham enrolled in extension classes at the University of California, Los Angeles (UCLA) where she studied English for two years. Despite her parents' objections, Graham withdrew from UCLA to pursue acting full-time.
Graham's first film appearance was an uncredited cameo in Mrs. Soffel (1984). Her first credited film appearance was in the television film Student Exchange. In 1986, she appeared on a special "Teen Week" episode of the NBC game show Scrabble. Then she appeared in numerous television commercials, and an episode of the sitcom Growing Pains in 1987. Her first high-profile starring role came in the Corey Haim/Corey Feldman vehicle License to Drive (1988), as a popular girl named Mercedes Lane, who serves as the love interest of Haim's character. Her efforts won her a Young Artist Award nomination in the Best Young Actress in a Motion Picture Comedy or Fantasy category. Her strict parents forbade her to accept a role in the black comedy Heathers (1988), which had an expletive-rich script. The same year, she had an uncredited appearance as Danny DeVito and Arnold Schwarzenegger's mother in Twins (during the laboratory conception flashback).
In 1989, Graham was featured in Gus Van Sant's Drugstore Cowboy as Nadine, a young drug-addicted accomplice of the two main characters (played by Matt Dillon and Kelly Lynch). Her performance gave her career an initial boost and earned her a nomination for the Independent Spirit Award for Best Supporting Actress. She rejected a steady role in a soap opera and a three-picture deal with a major studio because she thought it would be too restrictive. After Drugstore Cowboy she appeared in Lawrence Kasdan's dark comedy I Love You to Death (1990), alongside William Hurt and Keanu Reeves and the rock-and-roll coming-of-age film Shout (1991), for which she received a nomination for the Young Artist Award for Best Actress Starring in a Motion Picture.
After co-starring with Benicio Del Toro in a Calvin Klein commercial directed by David Lynch, the director cast her as Annie Blackburn in Twin Peaks, where she appeared in the final six episodes. Following the show's cancellation, Graham reprised the role of Blackburn in the 1992 prequel film Twin Peaks: Fire Walk with Me.
She featured in Diggstown (1992), alongside James Woods; the well-received Six Degrees of Separation (1993), alongside Will Smith; and The Ballad of Little Jo (1993), alongside Ian McKellen before re-teaming with Gus Van Sant for the critically panned film adaption of Even Cowgirls Get the Blues, alongside Uma Thurman. The same year she co-starred as Mary Kennedy Taylor in Mrs. Parker and the Vicious Circle. In 1995 she starred as Jackie in the poorly received Desert Winds and guest-starred in an episode of the television series Fallen Angels. She had a small but important role in Swingers (1996), where she played Lorraine, Jon Favreau's love interest. She also played a small role as Maggie Bowen in "Entertaining Angels: The Dorothy Day Story" (1996).
Graham's popularity significantly increased after she appeared as Brandi, a young porn star, nicknamed Rollergirl, in Paul Thomas Anderson's critically acclaimed, award-winning Boogie Nights (1997). The cast received a nomination for the Screen Actors Guild Award for Outstanding Performance by a Cast in a Motion Picture. The same year she also starred in the Gregg Araki film Nowhere, and had a cameo in the horror hit Scream 2. She was subsequently cast in Two Girls and a Guy (1998), a film mainly based upon dialogue between the characters which was shot in 11 days, which co-starred Robert Downey Jr. and Natasha Gregson; and the sci-fi film Lost in Space, which was met with mostly negative reviews and bombed at the box-office, making only $69,117,629 when its production budget was $80 million. The cast was signed on for sequels that have not yet been made.
She starred as Felicity Shagwell in the sequel Austin Powers: The Spy Who Shagged Me (1999), which was a box-office hit. Shagwell is one of her best-known roles and became a fan favorite. Her turn as Shagwell also earned her a nomination for the Saturn Award for Best Actress. She appeared in the music video for Lenny Kravitz's cover of "American Woman". Also in 1999, Graham co-starred as Daisy in the movie Bowfinger, opposite Steve Martin and Eddie Murphy.
The 2000 film Committed was her first starring vehicle. She played Joline, a devoted-beyond-reason young wife looking for the husband who left her. While the film itself received mixed-to-negative reviews, critics felt that "Graham shows she can play a central character" but noted "she's not enough to make Committed successful". The following year she co-starred as Annie Matthews, an unhappily married woman, in Edward Burns' Sidewalks of New York. In 2003, she starred with Joseph Fiennes in Chen Kaige's English-language debut film Killing Me Softly, which received overwhelmingly negative response from critics and a 0% at Rotten Tomatoes, with the consensus being: "Respected director Chen Kaige's first English-language film is a spectacularly misguided erotic thriller, with ludicrous plot twists and cringe-worthy dialogue". In 2009, the site also rated it No. 12 on the countdown of the worst films over the last ten years.
Graham's other appearances in mainstream fare include playing a fictionalized version of the Jack the Ripper murder victim Mary Kelly in the film From Hell (2001), starring Johnny Depp; Anger Management (2003), starring Adam Sandler and Jack Nicholson; the Farrelly Brothers comedy Say It Isn't So (2001), opposite Sally Field; The Guru, co-starring Jimi Mistry and Hope Springs (2003), co-starring Colin Firth.
During this period, Graham starred in the independent films Gray Matters, Broken, Adrift in Manhattan (all 2007) and Miss Conception (2008), which received negative-to-mixed reviews and most of them went largely unnoticed at the box-office. Her 2005 film Mary holds a 63% fresh rating on Rotten Tomatoes, her first "Fresh" film since Bowfinger. The film premiered at the 2005 Venice Film Festival where it won the Special Jury Prize as well as three smaller awards. The film also played at the 2005 Toronto International Film Festival, Deauville Film Festival and San Sebastián International Film Festival and co-starred Juliette Binoche, Forest Whitaker, Marion Cotillard and Matthew Modine. In 2006, she co-starred in Bobby as Angela; the film's cast was nominated for a Screen Actors Guild Award for Outstanding Performance by a Cast in a Motion Picture.
During this period Graham also spoke about developing a comedy film titled The Accidental Virgin which would have focused on "female sexual confusion", telling the story of a woman who hasn't had sex in a year. The film has not been made. She also stated she would be interested in directing in the future if there is "something that, its burning in my mind that I need to do".
On television, Graham played herself in an episode of the TV series Sex and the City. She was given special guest-star status on nine episodes of NBC-TV's Scrubs during its fourth season (2004–2005), and also appeared as George Michael Bluth's ethics teacher in an episode of Fox's television series, Arrested Development in 2004. She played Emily Sanders in Emily's Reasons Why Not, however, the sitcom was canceled after airing only one episode.
In 2009, Graham played the stripper with a heart of gold, Jade, in The Hangover, which was released to critical and box office success. She won the role after Lindsay Lohan turned it down. Though she did not return for the sequel The Hangover Part II, she reprised her role in the final installment of the trilogy, The Hangover Part III. In 2010, she starred in Boogie Woogie, followed by roles in the unsuccessful films Father of Invention, 5 Days of War, Judy Moody and the Not Bummer Summer (all 2011) and About Cherry (2012).
Graham voiced the character of Antonia Bayle in the online role-playing game EverQuest 2.
She played Meredith Crown in At Any Price, which stars Dennis Quaid and Zac Efron and was selected to compete for the Golden Lion at the 69th Venice International Film Festival, and later screened as an official selection at the Telluride and Toronto Film Festivals. Upcoming roles include mob lawyer Annette Stratton-Osborne in Behaving Badly and short story writer Mary Bellanova in My Dead Boyfriend (both 2014). She wrote a comedy screenplay called Half Magic, which she stated she wants to direct. She said the story focuses on "these female friends and sexuality and about people having a sense of shame about sexuality and learning how to have a healthier attitude about it [...] It also deals with male/female relationships and sexism".
In 2012, she was a member of the jury of the 15th Shanghai International Film Festival.
In 2014, she starred in the second adaption of the V. C. Andrews novel Flowers in the Attic on the Lifetime network. She played the character of Corrine Dollanganger; an evil mother who locks her four children in an attic in order to receive an inheritance from her dying father. Graham also appeared in two TV-movie sequels based on the V.C. Andrews' series: Petals on the Wind and If There Be Thorns; continuing to play the role of Corrine Dollanganger. She appeared in the final season of Californication as the mother of David Duchovny's long-lost son.
Besides her acting work, Graham is also an activist who serves as a public advocate for Children International. She stated that what she likes about Children International is that "you are helping a child have a better life. It's great for that child to know that someone who lives in another country cares about them". Graham works with the Cambodian Children's Fund which provides supplies and education, and campaigns to stop slavery. "There's a lot of human trafficking in Cambodia," Graham has said. "Women are dying because they don't have $15 to give birth in a hospital. The [Children's Fund] provides free education, clean water and healthcare for communities... We're creating future leaders who will be able to help themselves." In 2007 she supported the climate change campaign Global Cool and appeared in Shekhar Kapur's short film Global Cool alongside Sienna Miller.
Graham is considered a sex symbol. She was ranked at number 40 in FHM's 100 Sexiest Women in the World list in 2000, number 95 in 2001 list, number 97 in the 2002 list, number #74 in the 2005 list and at number #98 in 2006 list. In 2001 she was named one of the 50 Most Beautiful People by People. In 2003, she also posed for a photoshoot by photographer Sam Jones, during which she was levitated several feet into the air by a magician, who later also sawed her in half. Also in 2003, Graham appeared on the cover of Time magazine for an article titled "The Science of Meditation". To promote Emily's Reasons Why Not, she had posed for a Life Magazine cover story, printed weeks in advance of the assumed series schedule, referring to her as "TV's sexiest star" which appeared in the January 27, 2006 issue.
Graham is often cast in sexual roles including those of Felicity Shagwell (Austin Powers: The Spy who Shagged Me), porn stars Rollergirl (Boogie Nights) and Sharonna (The Guru), prostitute Mary Kelly (From Hell), porn director Margaret (About Cherry) and stripper Jade (The Hangover and The Hangover, Part III). She stated she finds these types of roles and the issue of sexuality fascinating, and believes that "our culture sends out mixed messages to women about sex. Are women supposed to be sexually alive people, or are we supposed to be 'good' mothers who would never do those things?" and that she likes "the fact some of my roles maybe help people open their minds about the way they think about sex". Due to her portrayals of sexual characters and nudity in films she has been described as "completely up for it".
In 2005, Graham became the spokeswoman and TV model for the Garnier brand of hair care products.
Graham is estranged from her parents. Regarding the media's perception of her relationship with her parents, she stated: "I don't really like to talk about my parents. Because I just feel that it gets misinterpreted in the press..."
She has been practicing transcendental meditation since 1991 after being introduced to it by David Lynch. She also expressed her dislike of reality television, stating in a 2007 interview: "I think some of it, it seems strange – why do we all want to watch people be so miserable? Other people’s pain and misery – it seems kind of sad."