San Francisco cop Jack Cates is at the Hunter's Point Raceway checking out a known associate of the Iceman, Tyrone Burroughs, who for unknown reasons is giving some money to mechanic Arthur Brock. When Jack orders them to surrender, Brock pulls out a gun and starts firing and Jack kills Brock in self-defense as Burroughs escapes.
Among those who show up at the scene are fellow cops Ben Kehoe and Frank Cruise, and also Blake Wilson, the head of the Internal Affairs division. Cates tells Wilson that he shot Brock in self-defense as Brock had opened fire on him. Cruise picks up a burnt piece of twisted metal but says that he can't find Brock's gun. Jack, however finds a partly burnt picture of Reggie Hammond in Brock's bag.
Jack then goes to visit Reggie in prison, with Reggie due for release in 24 hours. After getting hit in the face with a basketball by Reggie for refusing to promise Reggie his $500,000 unless Reggie helps him find the Ice Man, Jack discovers that Wilson plans to prosecute him on a charge of third degree manslaughter for the Arthur Brock shooting, with Wilson claiming that it was not self-defence and Jack is placed on suspension. Wilson also does not believe that the Iceman exists and believes Jack is wasting department resources looking for him.
After Reggie is released from prison, bikers Richard "Cherry" Ganz, the brother of Albert Ganz, and Willie Hickok from the Brotherhood who had earlier killed two highway patrol officers and a bartender at a bar out in the desert, pull up beside the prison bus and open fire on Reggie, causing the bus to crash. Ganz and Hickok then pull up to a diner where Ganz shoots Jack who is sitting inside. Jack and Reggie end up at the same hospital where it is revealed that Jack was wearing a bullet proof vest and Reggie had escaped the hit with nothing more than a bump on his head. Jack then convinces the attending police officers to release Reggie into his custody by telling them that he is needed to identify the Kingpin of a child pornography ring.
After arriving back in San Francisco, Jack and Reggie go to a bar, the bartender having called the police complaining about some bikers, again revealed to be Ganz, Hickok and the leader of the Brotherhood Malcolm Price. While Reggie is in the women's bathroom getting another patron's wallet back from a pick-pocket who tries unsuccessfully to stab him, Cates ends up in a bar fight with a man that he put in prison two years ago, and when Jack loses the advantage and starts getting beaten up, Reggie returns and asks the bartender if she has a gun and saves Jack by shooting one of the assailants in the left kneecap.
Reggie then tells Jack that if he wants to find the Iceman he needs to go back to prison to talk to a man named Kirkland Smith who had not only kept Reggie alive while inside, but knows everything that goes on. Smith tells Jack and Reggie that Malcolm Price is staying at the Sunset Motel on the beltway, then angrily tells Reggie to repay his debt to him before breaking the dividing glass with a single punch. However, before Jack and Reggie can get to the motel, the Iceman shows up and kills Malcolm by shooting Malcolm 16 times. Cherry Ganz and Hickok then visit Tyrone Burroughs and kill him as a warning to the Iceman that there is a heavy price for killing one of the Brotherhood.
Later that same day, Jack, who now thinks that he may never clear his name and find the Iceman, starts emptying his locker at the police station, and finally gives Reggie his money. That night, while Reggie is giving the money that he owes Kirkland Smith to his daughter Amy Smith, Cherry and Willie kidnap Reggie and Amy, and take them to the Bird Cage Club, where they meet with Cruise to receive a payoff for handing Reggie over to him (as retribution for the Ice Man killing one of their own). Cruise orders Cherry and Willie to kill Reggie and Amy, but then Jack shows up. Reggie then identifies the Iceman as Jack's friend Detective Ben Kehoe.
Jack realizes that Kehoe had Cruise pick up Brock's gun at the track because Kehoe wanted Jack out of the way. This leads to a wild shootout that takes place in the Bird Cage club, with all but Jack and Amy Smith being shot or killed. Reggie punches Cherry who falls out of the third floor window. Reggie is then taken hostage by Kehoe. Jack shoots Reggie in the shoulder after Reggie bluffs that Jack should shoot him (as in the first movie). When a surprised Reggie falls, Jack then kills Kehoe.
While Reggie is being loaded onto the ambulance, Jack tells him that he found $500,000 that Cruise was going to use to pay off the Brotherhood. Jack's name being cleared of all charges. Reggie tells Jack he is sorry that Jack had to kill his friend. Jack replies that Reggie is his real friend. As the ambulance leaves with Reggie, Jack realizes that Reggie (as in the conclusion of the first film) has successfully stolen his lighter.
Where is Jack when Ganz shoots him?
a diner