With the operation failed, Tokyo sends a death list of 100 names to the colonel in charge of intelligence operations in China, to be killed within a month. To smoke out the masked hero who foiled their operation last time, the Japanese leak the death list which causes panic among the populace, and pay a visit to the nightclub where Chen Zhen, disguised as his dead comrade Qin Tiansheng, is masquerading in the day as a partner of Master Liu, the nightclub owner and an influential businessman. As Chen Zhen looks nothing like his dead comrade who used to wear spectacles, the Japanese suspect of him of being the masked warrior and challenge him to save as many people as possible.
Most of the people on the death list refuse to leave, and have to be forced to leave by Chen Zhen's friend who is an inspector in the ineffectual, British controlled police force, and while Chen Zhen saves many of those on the death list, he is unable to save everyone in time. Eventually the colonel's younger brother leads a team of killers to kill the editor of the Shanghai Times, Chen Zhen's friend and comrade in the resistance. Chen Zhen arrives in the nick of time to see his friend killed right before his eyes and avenges him by killing all of the Japanese on the scene.
Meanwhile Chen Zhen is pursuing a romantic relationship with Kiki, one of the nightclub hostesses, whom is actually a captain in the Japanese army and one of their best spies. However Kiki starts to have conflicting feelings due to her love for Chen Zhen and does not inform the colonel of Chen Zhen's real identity and Chen Zhen eventually figures out who the spy in the nightclub is after noticing that Kiki always orders a particular brand of cigarettes even though she does not know how to smoke, and warns her to immediately leave Shanghai. At this point, the colonel, suspecting Kiki's loyalty, kidnaps the girlfriend of General Zeng's son and forces Kiki to kill her, even though they are both close friends. The incident is blamed on General Zhuo and General Zeng, backed by Japanese troops attack General Zhuo's forces, starting the Second Sino-Japanese War.
Eventually the Japanese simply kidnap Chen Zhen off the street in broad daylight and torture him at the Japanese headquarters. At the same time, Chen Zhen's comrades in the resistance, together with Chen Zhen's sister and his inspector friend, stage a raid on the Japanese headquarters and succeed in causing serious damage with the use of fire and explosives. As Chen Zhen has taken pictures with his comrades before, the Japanese are able to easily track down and have them hanged in public, while the colonel rapes Qin Tiansheng's sister (albeit misunderstood her as Chen Zhen's biological sister). Chen Zhen is thrown out of a car in front of the nightclub and is comatose for many days while he heals from his injuries.
With the Japanese invasion underway and General Zhuo killed in action with his forces in full retreat, there seems to be nothing the resistance can do to preventing the Japanese from occupying Shanghai. However the colonel sends Kiki, now clad in a Japanese army uniform, to the nightclub to issue a challenge to fight Chen Zhen in martial combat at the Hongkou Dojo, the same one that Chen Zhen defeated in Fist of Fury. Chen Zhen accepts the challenge and defeats all the students of the Dojo, before facing the colonel in one on one combat, which he wins. Although the Japanese eventually occupy Shanghai, Chen Zhen continues fighting as part of the resistance.