Rollie and Leo get the gold medallions from the mob and the money from Silak, who is stranded on the getaway helicopter without a pilot. They go to Rome and return the medallions to the Vatican, but keep the money.
Set five years after the events of the first movie, Rollie Tyler (Bryan Brown) has retired from special effects and is now a high-end toymaker. One of his toys is a life-size clown that mimics the actions of whoever is wearing a special suit. He is dating schoolteacher Kim (Rachel Ticotin), who has a son Chris. Kim's ex-husband Mike is a NYPD detective, and he asks Rollie to use his F/X skills in helping catch a serial killer, and he reluctantly agrees. As Rollie is setting up his equipment, Mike asks him to videotape the events, so he places two lipstick cameras in the room and sets up a videotape recording. The plan is going well, but just as Mike is about to catch the serial killer, another person enters the room and kills Mike. The serial killer is blamed for Mike's murder and is shot to death by Mike's boss, Lt. Silak (Philip Bosco). Rollie sees the real killer and chases him, but he gets away. Rollie then goes back to the videotape of the crime, and he sees Silak plant Mike's murder weapon on the serial killer.
The next day, Silak asks Rollie if Mike ever talked to him about old cases, and he says no. Silak also tells Rollie that he found the cameras. Realizing he is in trouble, Rollie calls his old friend Leo McCarthy (Brian Dennehy), who left the NYPD and is now a private investigator, to look into Mike's death. Leo figures out that Mike was killed while investigating an old case about the theft of several gold medallions from the Vatican collection at a museum. The man who stole the medallions was caught, but they were never found. That man is now on a prison death bed, and he tells another prisoner, Matt Neely, where he hid the coins. Silak found out about that case, and he wanted the medallions for himself. He tells Matt that he will secure his parole if he assists in getting the medallions, which are hidden in the confessional booth at a Catholic Church in New York City. Meanwhile, Mike's killer is going after Rollie. They fight at his apartment, but Rollie is able to get away. Later, the killer tracks Rollie, Kim, and Chris to a grocery store. Rollie is able to use items in the store to outwit the killer, and he is eventually caught by Rollie and tells him that Silak hired him to kill Mike.
Knowing he can't go to the NYPD, Leo asks his D.A. friend Liz Kennedy (Joanna Gleason) to assist in the capture of Silak. She agrees, and together they learn that Silak and Matt are going to sell the medallions to the mob. After finding out the location of the sale is at a lakehouse owned by the mob, Leo tells Rollie, who proceeds to set up his effects at the house in order to incapacitate the mob members. On the day of the sale, Liz tells Leo that New York State Troopers will back them up. As Rollie takes out the mob one by one, Leo give Liz a gun and they enter the house and attempt to prevent the sale. The mob tells Leo that they want to buy the medallions, but not to sell them, but to return them to their rightful owner, the Vatican. Leo tells Liz to bring in the cops, but she points her gun at Leo. She's in on it with Silak and Matt. Just as Rollie's effects are getting closer, she shoots Leo and everyone else flees, with Silak taking the money and Matt taking Liz's gun. The mob grabs the medallions and somehow get away.
Before Liz can get away, Leo gets up and reveals that her shot was just a squib used by F/X artists in movies and TV shows. He suspected she was in on it from the beginning, and he called the cops in case she "forgot", who arrive at that time. Meanwhile, Silak and Matt are about to get in a helicopter to get away. Matt attempts to double-cross Silak by shooting him, but since it was with the gun Leo gave to Liz, it was loaded with blanks. Silak then shoots and kills Matt and gets on the helicopter and it takes off. Leo catches up to Rollie, who is piloting a boat. Silak thinks he has escaped, but then he realizes that the helicopter is being flown by Rollie's toy clown. Rollie, wearing the clown's special suit, has been piloting the helicopter remotely, and thanks to a camera placed on the clown, he can use it to pick up the money and jump out of the helicopter. Silak is now forced to fly the helicopter on his own. Rollie and Leo pick up the clown and the money, and Rollie reveals he also has the medallions (he switched them at some point, so the mob has fakes ones). Leo then tells Rollie what the mob was going to do with them.
The next scene is at a church, where Rollie and Leo place the medallions in a collection plate. They exit the church, and we see that it's the Vatican in Rome. The movie ends with them asking each other what they are going to do with their share of the money.