Ozu Terumi Shimazu, the villain from the previous film, stalks a dark alley until Kommandant Moebius Scott King steps in. Ozu offers him the puppet Tunneler in exchange for her freedom, and Moebius accepts the prize with a brutal twist: the exchange immediately costs the life of SS Soldier #1. He then “frees” Ozu by shooting her in the head, a cold display that leaves the room shadowed in silence as the puppet Blade watches from the shadows.
The next morning, Danny Kip Canyon and Beth Jean Louise O'Sullivan are recovering at Danny’s house. Danny admits to the others that he couldn't revive Ninja, but the resolve is clear: they will recover Tunneler from the Nazis. The mood brightens briefly when Blade appears and informs them of Ozu’s death and Tunneler’s capture, yet their plan is interrupted by a knock at the door and a tense grab by mysterious men in suits.
In a hidden Chinatown lab, Dr. Freuhoffer [Oto Brezina], a captured Austrian doctor with an unsettling obsession for dolls, works under Moebius to develop a machine capable of reanimating the dead. The alluring Uschi [Stephanie Sanditz], a Nazi woman with dangerous charm, tries to steer him, but Moebius interrupts and demands a demonstration. He brings in a Japanese man and slits his throat; a grotesque trial run for the machine shows the man briefly moving before decaying. Freuhoffer vows to fix the device, while Moebius reminds him of the consequences should he fail, including harm to his daughter. Freuhoffer is then shown Tunneler, which Moebius intends to study.
Danny and Beth soon find themselves at a military base where Major Collins commends their earlier actions against a weapons factory bombing in the previous film. He also announces that General Porter will soon arrive to present a medal, and to ensure their safety, Sergeant Stone [Brad Potts] is assigned as their bodyguard. Stone’s blunt, sexist attitude clashes with the world the puppets are trying to navigate, creating friction that Danny and Beth must manage as they press on.
Back at the laboratory, Freuhoffer examines Tunneler while Uschi makes another pass at him, only to be interrupted by Moebius with a violent outburst. Freuhoffer attempts to use the fluid extracted from Tunneler to revive Uschi, but the effort fails. Undeterred, he unveils his latest creation: Bombshell—a puppet modeled after Uschi with machine guns mounted in her chest. Moebius reacts with a mix of amusement and appetite for completion, reminding Freuhoffer that the machine must be finished.
To protect their allies, Danny and Beth enlist Stone’s help and reveal a troubling truth: the Nazis have one of the puppets they care about and must be recovered. They disguise their mission and head to Chinatown with Blade and Pinhead, only to be ambushed by Bombshell and forced to retreat. Bombshell returns to the lab, where Freuhoffer unveils three more puppets: Weremacht, a werewolf; Blitzkrieg, a tank; and Kamikaze, a suicidal puppet. The threat expands in scope and danger, and the group realizes they are dealing with an organized, weaponized army of puppets.
As the team prepares for an awards ceremony, Leech Woman tries to warn them of danger, but the event proceeds. Freuhoffer’s puppets descend on Major Collins during the ceremony, killing him, and Danny’s puppets fight valiantly but are driven back. Porter, grateful for what Danny has done, allows him to join the army, deepening Danny’s commitment to the fight.
The team searches for a way to halt the Nazi puppets and keep their world intact. Leech Woman dramatically reveals Six-Shooter’s severed head, underscoring the severity of the threat. Danny and the crew eventually track the lab, eliminate the guards, and recover Tunneler. Inside, they collide with Moebius and Freuhoffer’s puppets in a fierce confrontation. The Nazi puppets are finally overcome, but the cost is high: Moebius stabs and kills Stone [Brad Potts], a brutal betrayal that leaves Danny searching for his next move. Moebius presses on, pulling a gun on Danny while declaring his intent to end the threat, but Danny stands firm and fires back with a defiant resolve: “Never screw with America.”
Blade then strikes from behind, delivering a fatal stab to Moebius, a moment of grim triumph for the puppets. Beth and Freuhoffer emerge to command Kamikaze to detonate, severing the lab and destroying Moebius in a final, explosive act. In the aftermath, Danny and Beth decide to release Freuhoffer, though the closing moment hints that he still holds a vial of the puppets’ fluid, a dangerous reminder that the fight may yet continue.
