Before they go to the police station, however, Danny must make a quick detour - to the funeral of his aunt Rose. With Snake handcuffed to Danny while at the funeral, Danny comes into contact with his ex-wife Anna (Darlanne Fluegel), who has a better friendship with Ray than she does with Danny. On their way back to their car, they're almost robbed by two men. When Danny and Ray display their badges and their superior firepower, the robbers run. Danny and Ray give short chase, but soon wind up spending more time arguing about whose bullets hit the robbers' car than dealing with the robbers.
At the police station, Danny sees someone he thinks is there to give him a subpoena and asks Ray to pretend to be him. Ray hides in a women's bathroom ("I'm on a stakeout"), and is confronted by a lawyer, who tells 'Danny' that his aunt left him approximately $40,000 inheritance. Meanwhile, Danny finds out from Anna that she's engaged to a dentist. Although Anna still has feelings for Danny, she wants someone who's more stable.
During a mock police lineup, Danny and Ray talk to Snake, asking him to give information on what Julio is doing in Chicago. Although they threaten Snake by telling him they'll bust Julio without him and tell him Snake was involved anyway, Snake still refuses to talk. When Snake is let out of jail, he collects his belongings and signs for his money. However, in his haste, he signs a sheet saying that he only had $5,000 in his briefcase, instead of $50,000. Now with the means to blackmail Snake, Danny and Ray set up a wire on him.
Later that night at a shipping port, Snake is helping to load boxes onto a van in exchange for the $50,000. However, the boxes are not filled with stolen TVs as Snake told them - unbeknownst to Ray and Danny, they're actually filled with machine guns. They raid the boat Snake is on and jump in when they think Snake is being tortured by Julio, but they soon find themselves in a trap when it turns out Snake was faking his injuries over the wire. Julio's men have Ray and Danny surrounded, while Snake dangles the wire from his body. However, Julio is still angry that Snake led cops to him, and Snake is shot. Just when it appears Ray and Danny are next, two undercover policemen - who were part of Julio's gang - tell Julio he's under arrest. A firefight breaks out, with Ray and Danny ducking out of the way. Julio and his men run through the ship, but while the two undercover policemen are only able to find some of Julio's men, Ray and Danny are able to find and arrest Julio.
Back at the station, Ray and Danny talk with their captain (Dan Hedaya), but rather than give them a commendation, he goes after them for their sloppy work. To highlight this, he plays the tape from Snake's wire, which discredits Danny and Ray's story that the "two young hotshots" panicked. To cover things up, Captain Logan forces Ray and Danny to go on vacation.
As a result Ray and Danny then find themselves in Key West, Florida - as Ray put it, "It's the farthest south you can go without having to speak Spanish." The two cops are surprised to find that when people congregate around the ocean, it's not because of a drowning or downed boat - they're there just to watch the sunset. Realizing the fun they could be having, a montage (set to the tune of Michael McDonald's Sweet Freedom) shows the two enjoying their time in Florida. The skimpy 80s outfits that the characters wear, along with the Michael McDonald soundtrack, qualify this montage as high comedy by today's standards. On the prospect of having to go back to Chicago, Danny convinces Ray to share in buying a bar. Using Danny's inheritance money and their pension funds, they are able to secure a loan for a bar, where Ray could still break up fights and they could be 'robbed' (allowing them to still use their guns).
Back in Chicago with a calmer attitude, the two announce their intention to retire - but are told by the captain that Gonzales made bail and is free again. Vowing to capture Gonzales before they retire, they head out with a little "protection," in the form of bullet-proof vests. While attempting to track Gonzales down yet again, they find his car parked in front of an apartment building. Danny paints a yellow 'Tow-Away' zone line on the curb and has Gonzales' car towed away. As he predicted, one of the street kids runs up to tell Julio and they follow him to the apartment - but not before Ray calls for backup, still remembering what happened on the boat. In the apartment, Danny and Ray charge in and confront some of Gonzales' men. After Danny gets the drop on one of them, the men drop their guns, but Gonzales runs out still in his underwear and shirt. Danny and Ray give chase, but Julio pulls aside a woman and uses her as hostage in exchange for Danny's pants. Danny's throw is short, and Ray has to give up his pants as well. The two detectives chase Gonzales out of the building, but Gonzales gets away by stealing their car. When multiple police cars finally pull up - Ray had never called for backup before, so the police came out in full force - Ray and Danny are humiliated in front of all of them.
As a further insult, they're told they have to break in two new detectives - none other than the undercover policemen who saved them on the Gonzales bust: Anthony Montoya (Jon Gries) and Frank Sigliano (Steven Bauer). As the captain puts it, "I want you to make them the best of the worst." Ray and Danny have their car changed to a better fit in to the Chicago streets and afford them some extra protection. To that end, they have their car changed to a Yellow Taxi with bulletproof windows (though Ray first puts a large dent in the front before he's satisfied that it looks like an authentic taxi). Ray and Danny, along with Montoya and Sigliano, raid one of Gonzales' places. In the ensuing shootout, Danny is hit in the chest by Sigliano - but fortunately is wearing his bulltproof vest. While chasing the remaining men, Ray and Danny catch Juan, a person who offers to give information on a drug shipment Gonzales is expecting. After getting the information about a shipment coming in from Colombia, they let Juan go, who is then chased by Montoya and Sigliano.
At the airport, a shipment is found - but by Montoya and Sigliano, who are given credit for the bust. However, the drugs are actually a decoy - another detective tells Ray and Danny that the drugs found were enough to convince the dogs, but are otherwise useless. Realizing the setup, Ray and Danny find Julio greeting a priest and a nun, coming in from another flight from Colombia. Seeing Danny chase after him, Julio jumps in his car and has his driver drive off, with the priest and nun's bags in his trunk. Ray pulls up in their 'taxi', and they all drive off after Julio. Convinced that the priest and nun are fakes, Danny handcuffs the two of them in the back. Julio's driver then causes the chase to run from city streets to CTA Brown Line. Eventually, the two cars are running along the Chicago 'L', the metro line. When they travel into the Red Line Subway, Julio fires at the police car, but the bulletproof windows hold up. However, Danny can't roll the windows down to return fire. The chase ends when Ray drives his car behind Julio's, and the two cars stop in the face of an oncoming Orange Line train. Julio and his driver manage to get away at the Brown and Purple Line LaSalle/Van Buren (CTA) Station where they crashed into a train, but the contents of the trunk are still there as Julio's car was only flipped.
At the police station, the contents, dolls made in Colombia, are opened - but they're filled with sand, not cocaine. Ray and Danny are forced to apologize to the priest and nun, who turn out to be real, and who explain that Julio was supporting their outreach mission. However, when the priest and nun leave, Danny and Ray see that the dolls themselves crumble - the dolls are made out of cocaine, which is how Julio was smuggling his drugs in. Confronting Juan at his tattoo parlor, Ray and Danny coerce him into giving more information about where Julio will be. However, while waiting for Julio, they're trapped by a garbage truck's claws. Julio then makes an appearance, offering to pay the remainder of the mortgage on their bar in Key West in exchange for his drugs, where he'll become "the first Spanish Godfather of Chicago". Danny refuses, and Juan, who was driving the truck, lowers the car into the truck and activates the compactor. Ray and Danny barely make it out on time, but Julio and Juan are nowhere to be seen.
Fed up with chasing Julio, Danny decides to have Julio go after them. He and Ray go to the impound yard where Julio's Mercedes car is stored, and they sign it out as Julio and proceed to drive it around the Chicago streets so they get noticed. Anna comes to Danny's apartment, where they get into an argument about if Anna really wants to marry a dentist or if she still loves him or not. When she leaves, Anna is kidnapped by Julio's men. Julio calls Danny and tells him he wants his drugs back. Danny finds Ray and the two of them first sneak the drugs out of the police station (Ray having an 'order' from their captain, and Danny on he phone as the captain, agreeing to let the drugs go only if both are present). They then go to their local bar, waiting for a call from Julio while they load up multiple weapons and ammunition clips. Montoya and Sigliano find them at the bar, but Ray and Danny punch them out rather than explain anything and leave. Julio called and offered to make the exchange for Anna at Chicago's State of Illinois Center (now known as the James R. Thompson Center).
At the Center, Danny goes in with the drugs, while Ray goes from the basement. Ray finds one of the security guards is none other than Juan, and the real security guards are tied up. The only way Ray can sneak in is through a scaffolding unit from the outside. Inside the building, Danny gets into an elevator and shows the drugs to Julio, who is waiting across the way. When he realizes that the guards are going to shoot him and Anna, he has them both duck and pulls out a hidden gun, shooting the fake guard. Ray comes in from above and starts shooting at the guards. Montoya and Sigliano soon wander into the firefight, but are caught in the middle and duck from the gunfire. Danny then proceeds to throw all the bags of cocaine down to the ground, where the bags explode into white puffs of smoke. Danny then has Anna jump to his elevator car and hands her his gun, while he goes through the building getting into shooting matches with the fake guards. In the end, Danny and Ray make it to the ground floor, having shot everyone, including Julio. Their meeting with Montoya and Sigliano is shortlived, though, when a wounded Julio points his machine gun at them. Ray and Danny then split up, shooting Julio dead, but both wind up getting shot, Danny in the arm and Ray in the leg. A grateful Anna runs into Danny's arms, confirming that she's leaving her dentist fiance behind. Ray and Danny then muse that Chicago's streets won't be safe without them, and walk off asking Montoya and Sigliano if they want to buy a bar.
The film is also remembered for the soundtrack hit "Sweet Freedom" by Michael McDonald co written by Rod Temperton. Due to the success of the film, it reached #7 in the U.S. charts. The song, however, remains unavailable on iTunes.
The Herbaliser used a bit of the dialogue in the song "Who's The Realest"