Judith Gray and Matt Cable, two police officers, in front of the Toyland Warehouse, a warehouse for overstocked toys, waiting to arrest gun dealers Lincoln, and Guy Hesse, for selling illegal guns from foreign countries. While they're waiting, Judith tells Matt about a strange dream she's been having: Two boys, one good, one bad, playing war, and a small wooden room with a dangling lamp hanging from the ceiling. She also mentions to Matt that she is 31 days pregnant. The gun dealers finally arrive, but ends with Matt shooting Hesse in the ribs, and Lincoln shooting Matt in the chest, killing him. With Hesse still alive (barely), Lincoln and Hesse run and hide inside the Toyland Warehouse, with Judith chasing them, and they split up, and Judith continues to go after Lincoln.
Meanwhile in the Security Office, the Security Guard Charneski places an order at Chunky Chicken, a chicken delivery service owned by Peterson, and is run by Andy and Mark Wayne. Mark, who is a friend of Charneski, grabs his food and takes off to deliver it. Meanwhile, Hesse, who's dying, sees a spot of light shining from the ceiling to the floor. But as he bleeds on the ground, the toys that are around him begin to come to life. He gets bitten in the neck by Jack Attack, gets his fingers eaten off by Grizzly, and gets shot in the chest by Mr. Static. Meanwhile with Judith, she finally handcuffs Lincoln in the storage closet when suddenly, the door to the storage closet closes and locks them in. Meanwhile, Mark arrives with Charneski's food, when he hears gunshots coming from Judith in the storage closet and leaves to go get Charneski.
After unlocking them from the storage closet, Charneski leaves to call the police. But on his way back, Grizzly Teddy hits him in the leg with a bat, causing him to trip, and lose his gun. The gun lands in the hands of Baby Oopsy Daisy, who shoots Charneski in the leg. Jack Attack begins to strangle him, Grizzly Teddy continues to tear his face up, and Baby Oopsy Daisy stabs Charneski in the crotch with a knife, with Mark and Judith watching in horror. Baby Oopsy Daisy then pulls Charneski downstairs to the spotlight, and draws a pentagram around his corpse. Meanwhile, a runaway named Anne (Ellen Dunning), who's been hiding in the air-conditioner shafts, finally comes out and sticks along with the group. She explains that she's a runaway because her dad uses her for batting practice. Judith asks how they can get out, and Mark explains that the doors don't open 'til morning, but they're able to be open up from the office, but they can get there through the air-conditioner shafts.
Judith explains that she can't leave Lincoln because she has to bring him in, so Mark and Anne continue to head to the office. On the way, they see three little girls wearing gas masks, riding clown tricycles. Anne explains that they're hallucinations. They're not spirits or toys. They finally reach the office, only to find the entire place trashed. They are attacked by Mr. Static and Baby Oopsy Daisy, until Mark uses Charneski's bug spray and lighter as a flame-thrower, and burns Baby Oopsy Daisy and Mr. Static. Jack Attack bites Anne in the neck, but when Mark pulls him off, he is bitten. Baby Oopsy Daisy comes back and stabs Anne in the eye, killing her. Mark finally gets Jack Attack off his neck, and shoots his head off with a shotgun Charneski had in his locker. He shoots at Baby Oopsy Daisy, but misses, and Baby Oopsy Daisy runs away. Mark grabs the rest of the shells and looks for Judith.
Judith looks inside a doll house transported to the lair of "The Kid". He reveals that he is a spirit of a demon, and he can take the form of anything he wants. He explains that he wants to become a human. In order for him to do that, he has to impregnate a woman, so his soul can transfer into the woman's egg, where he has to eat the baby's soul, and take over its shell. If the baby doesn't make it through the birth, he has to be buried like a seed, and once he's grown, he should rise from the ground and do it all over again. The last time he was born was 66 years ago, October 31, 1925. He was torturing a doctor and his wife (Jim Mercer and Pat Crawford Brown) to help him, but the baby didn't make it through the birth, so they tricked a group of trick or treaters to bury him somewhere, but he was buried underneath the construction site of the warehouse, so he wasn't able to get out. That is, until Hesse bled onto the spotlight, because the blood from a human helps him come alive and helps him get strong until he does the nasty with an impregnated woman.
While Judith is in the dollhouse, Lincoln, who's had a knife with him the entire time, uses it to free himself from his handcuffs, and escapes. Meanwhile with Judith, the Demon explains that the spotlight was where he was buried for the past 66 years, and he lured her here, because she is already pregnant. Judith is sent back to the warehouse, and finds Lincoln missing from his handcuffs. She then leaves to go after him. Mark looks for more toys to shoot as he sees the three girls on tricycles and reminds himself that they're not real as they disappear, the lead girl reappears, turns into an adult and starts undressing, then turns into Miss July "seen earlier in one Charnetski's magazines" and starts talking in the demons voice as she turns into Anne with the cut up eye and then disappears, Lincoln catches up to Mark and is about to blow his brains out when Judith finally catches up and shoots Lincoln in the head, killing him. Suddenly, all of the toys that are around them start coming to life, and they begin shooting them to death, including Mr. Static, Baby Oopsy Daisy, and Grizzly Teddy. Suddenly, Grizzly Teddy starts turning into a man-sized monster and throws Mark against the wall, and chases after Judith. Judith then finds herself inside the wooden room with the dangling lamp hanging from the ceiling. Judith, knowing this is the end, is about to shoot herself in the mouth, when all of a sudden, a little toy-soldier opens the other locked door for her, and Judith attempts to escape but she is caught by the Demon. The Demon takes Judith over to the pentagram and ties her up. Meanwhile, Mark, who is still alive, is about to leave, when he hears Judith's screams and goes back inside to save her however he is attacked by Grizzly Teddy. Mark runs back into his delivery car, and rams the Monster into the wall. Mark then shoots the gas tank, lights it, and the car explodes, killing the Grizzly Monster. Meanwhile, as the Demon, now in the form of a man is about to rape Judith, the little toy-soldier shoots the demon in the eye, cuts Judith free, and turns into a little boy soldier. The Man-Devil transforms back into the kid and the kids begin fighting, explaining the entire war card game in Judith's dream. As "The Kid" is about to kill the Fair-Haired Boy, Judith stabs him with the Fair-Haired Boy's sword and the demon is sent back to Hell. Before heading back to Heaven, the Fair-Haired Boy explains to Judith that he's the spirit of the son she's going to have in the next 8 months. Judith finally reunites with Mark, and the two wait for the doors of the Warehouse to open and let them go.
Appeared to take place right after the events of Demonic Toys, an unknown stranger with a pair of gloved hands picks up the pieces of the destroyed toys and starts stitching them together. The only toys the perpetrator could fix correctly were Baby oopsie daisy and Jack Attack. The unidentified man then puts the toys in a crate, and is handed over a suitcase full of cash by another man, who then leaves with the toys. The film then switches to Italy, where college graduate student Caitlin and Mr. Butterfield, of the Antiquates Foundation (who works in carbon dating antique toys), wait outside of a castle for someone to arrive. The someone finally arrives, and is revealed to be Dr. Emilio Lorca, who survived his attack at the end of Hideous!. Also with Dr. Lorca is his sweetheart Lauraline and her stepson David, and a little woman named Lillith, who is a psychic of some sorts. Dr. Lorca's driver, Eric accidentally drops a crate that Dr. Lorca wants brought into the house, revealing the Demonic Toys inside it. It is revealed that Dr. Lorca is still collecting oddity toys. He's arrived because Caitlin called and told him about an oddity toy she found within the castle that's able to move. The castle's current owners seldom come there, meaning they're superstitious of everything that's happened in there. The owners decided to empty and sell it to Italian government to make it a historical landmark and keep it open for the public. Caitlin takes them inside the castle and gives them its history.
The castle was built in the 13th century, believed to be built over the temple of Jupiter Optimus Maximus by the local villagers. It was once ruled by Fiora Borisoff, a Bulgarian empress who used to practice black magic and fled her own country when her people revolted her. Since then, the castle was home to Italian royalty, and a few murderous madmen. The paintings are believed to have demons hidden in the background. If any one of them does so, then they represent one of Fiora's personal demons. Caitlin then takes them into the dining room, with a box on the table. The toy Caitlin found was buried in the dungeon inside a large stone container that was like an ornamental mosaic tile. The case container was made out of hand compound steel with some magnetic and fixtures. The doll itself was hand carved out of wood with a mixture of fabric elements. Caitlin opens the box and shows them the doll Divoletto. Mr. Butterfield examines the toy and claims it is the oldest toy he's ever seen, made possibly in the 14th century. Caitlin then shows them how it moves. Just tap a wand on the side of the box a couple of times and then it will come to life. After a while, the toy finally moves. Caitlin believes that there are magnets in the wand and when the box is tapped, it sets off the springs and mechanisms inside of Divoletto. However, Lillith thinks differently. Eric suddenly runs in the room and tells them that their cars are gone. Since everything is closed and have no transportation to get back to Rome, Caitlin suggests that they stay at the castle for the night. Meanwhile, Lillith examines Divoletto to catch a vision of some sorts, and sees a vision of the future where Divoletto's killing them all.
After she leaves, Divoletto walks around the castle and finds Baby oopsie and Jack Attack. He touches them, his source of life goes through them, and the demonic toys come back to life. Baby Oopsy Daisy (voiced by Jane Weidlin) then welcomes Divoletto to the club and quickly the trio dolls become friends. When Dr. Lorca leaves to go get Lauraline food, it's revealed that Lauraline and Eric are lovers who have brought a replica of Divoletto to the castle to steal the real one, runaway together and make a fortune. Eric is also the one who took away their cars. Eric leaves to go replace Divoletto, and he finds the real toy gone. Eric then sees Divoletto walking around and finds himself locked in the dining room. As he tries to escape, Baby Oopsy Daisy stabs him in the foot with a kitchen knife and Jack Attack pops out of his box and slashes Eric's throat with his tail. Everyone in the castle hears Eric's screams, but David confirms to Caitlin and Mr. Butterfield that it's Eric having sex with Lauraline. Caitlin then decides to give David and Mr. Butterfield the grand tour of the castle. Meanwhile, Lillith comes across Dr. Lorca and asks him to tell the others to meet her for a seance at midnight. Before he leaves, she tells him to be careful, as she gets a vision of Dr. Lorca getting stabbed in the back of the head. Meanwhile, Caitlin reaches to the physicians room of the castle, which was used to cure a person's soul by torturing it, to make the bad part of the soul go away. The Physicians would use lancets to drain the bloodline for medicine and exorcisms. They also find clay vessels in the room. Mr. Butterfield then finds a flight of stairs that leads into the dungeon. David and Caitlin goes down the stairs while Mr. Butterfield decides to go to bed.
Meanwhile, Dr. Lorca returns to his room and begins to make love to Lauraline, who in a disgusted manner, plays along. Meanwhile, Lillith goes to see another vision out of Divoletto, not knowing that she's holding the replica. After seeing the vision of the replica being made, the castle starts to shake like an earthquake. After this, the picture of Fiora Borisoff starts to move and one of Fiora's personal demons drives into Lillith and she falls unconscious on the table. Meanwhile, David and Caitlin get attacked by bats in the dungeon and realize that they're in a natural cavern. They then find a well-like structure with the words "Prodigious Abyssus" carved onto it, which Caitlin claims is a portal to hell. They then find a book called "Prodigium Exorcisio", which Caitlin claims is an exorcist journal. Through the journal, Caitlin finds out that Fiora's doctors were believed she was possessed by demons, so they brought her down to the cavern to perform exorcisms on her. The exorcist would've performed rituals on her to rid her from her personal demons. One of them turns out to be the portrait of Fiora herself, including the clay vessels. Her personal demons consist of jealousy, hatred, humility and revenge. Meanwhile, Mr. Butterfield finds some valuable items in his room and stuffs them into his clothes. As he tries to sleep, the toys walk into his room and Baby Whoopsie and Divoletto climb on the wall where two swords are hanging. Jack Attack forces Mr. Butterfield to jump out of bed and the swords come down on him, slicing his head off. Meanwhile, David, Caitlin and Dr. Lorca meet in the living room at midnight for the seance, and Lillith brings forth the spirit of Fiora and becomes possessed.
The spirit tells them to leave the castle in peace, but take nothing or there will be consequences. Meawnhile, Lauraline sneaks off to find Eric. She goes into the dining room and finds the doll missing from its box, but also finds some jewels and diamonds in the side table drawers. She then cranks Jack Attack's box up, popping him out and he bites her neck. Meanwhile, the spirit of Fiora disappears and Lillith returns to normal, and tells them that the Divoletto doll they have right now is a replica. Baby Whoopsie appears and stabs David in the arm. Dr. Lorca pulls out a small gun hidden in his coat and shoots at Baby Whoopsie. Dr. Lorca then continues to threatens to kill Caitlin if Divoletto is really a replica. David then punches Dr. Lorca in the face and steals his gun. Lillith, David and Caitlin runoff to escape and they run into Lauraline, who survived her attack by Jack Attack. Lauraline grabs the gun off of David and points it at Caitlin, since she's the one who brought them into the castle. David and Lauraline fight over the gun and Lauraline screams she's going to kill him the same way she killed David's father. The gun then goes off and hits Lauraline in the chest, killing her. Dr. Lorca runs in on them and scares them away, and mourns over Lauraline's body. The trio run into the physicians room and head down the staircase. Dr. Lorca grabs a hatchet lying in the hallway and runs into the room, when suddenly Baby Whoopsie jumps on his back and stabs him in the skull, fulfilling Lillith's vision. Meanwhile, David, Lillith and Caitlin run to the Prodigium Abyssus, where Divoletto jumps on Lillith, and the spirit of Fiora possesses her and throws him off her.
David then smashes Divoletto's head with a shovel, but it's revealed that Divoletto was one of Fiora's personal demons. The demon then sucks Fiora's spirit out of Lillith and brings her through the portal back to hell. The demonic toys then attack them and David cuts their heads off with the shovel, killing them. The next day, David, Caitlin and a spooked out Lillith leave the castle, with the demonic toys remains so no one else can find them, along with the clay vessels containing Fiora's personal demons. The sound of glass shatter is heard, and the painting of Fiora at the castle starts whispering, implying that Fiora's revenge personal demon has been released.
Brick Bardo hitchhiking to get to the town of Pahoota, where he tries to find a girl named Nurse Ginger (Melissa Behr, who was shrunken to 11 inches in Bad Channels), to prove to her that she is not alone. Meanwhile, the film cuts to Judith Grey, who has a nightmare about the events that happened in the previous film a year before. Ever since the events that took place a year before, Judith has been watching the Toyland Warehouse, believing that the toys are still alive. Meanwhile, a drunken bum enters the warehouse to shelter from the rain, and starts to mess around with a clown tricycle, until he gets knocked in the head with a box of toys, causing him to hit his head on the ground, killing him. However, his blood continues to flow over to the place where the demon was buried, and brings back: Baby Oopsy Daisy, Jack Attack, and Mr. Static, but Grizzly Teddy is replaced by a new toy named Zombietoid - a blonde GI Joe action figure with a sword as a weapon.
Judith, who's now inside the building, sees the toys in full view, but is then arrested for breaking into a secluded building while serving out a suspension. After the police leave, the toys force the new security guard Ray Vernon to help them with their needs. Ginger who spends her time on a kitchen counter all alone is being harassed by a sleazy reporter (Phil Brock) for an interview and so she reluctantly agrees to one so he'll leave her in peace. After he leaves, a big spider appears and as Ginger screams, Brick suddenly shows up and shoots it dead. Then a surprised Ginger asks Brick how he's so tiny like her, which results in both characters recapping their stories. Although Ginger explains that it's herself who's been left at a doll sized height by aliens, instead of Bunny, which was what occurred in the actual story of Bad Channels.
Meanwhile, Judith, who now knows about Nurse Ginger and Brick Bardo's history, bribes the news reporter to tell her where they're at, and tells her they are in Pahoota. Judith, after having a deal with Bardo and Ginger to help her kill the toys, go to the warehouse and Ginger initially doesn't believe the tale about the toys being really alive. Meanwhile, the toys kill a blonde hooker and makes her bleed on the place where the demon was buried. As Judith and friends enter the building, a fight begins, ending with Judith shooting Ray in the head (killing him), Mr. Static shooting Judith in the chest (killing her), and Brick shooting Mr. Static (killing him). Brick, who has made a promise to Judith (cop to cop thing), continues to finish that promise, but Zombietoid knocks his gun out of his hand and it falls under a pile of crates, and has his hands and feet tied to two toy trucks, and Ginger tied on to a clock when they are separated inside the ventilation shafts.
Baby Oopsy Daisy explains to Brick that once midnight strikes, the Demon's soul is going to go inside Baby Oopsy Daisy, so he can rape Nurse Ginger, make the baby, eat its soul from the shell, and become a human. As Baby Oopsie Daisy is about to kill Brick, Ginger breaks free, cuts him loose, and gets carried away by Zombietoid, who continues to go after Brick. Brick and Zombietoid begin fighting, until Zombietoid's machete gets caught in an electric socket, killing him. After using a hockey stick to retrieve his gun, Brick continues on and finds Jack Attack, whom he kills by shooting its face with a single bullet, causing Jack Attack to die laughing, then leaving only his torso intact.
Brick finally gets to the dollhouse shortly after the stroke of midnight and sees Baby Oopsy Daisy undressing Ginger in preparation for sex. Baby Oopsy Daisey demands Brick to drop his firearm or he will quickly kill Ginger with cervical dislocation. Brick complies and tosses his gun out of his reach. Baby Oopsy Daisey tries to penetrate Ginger but is once again interrupted, this time due to a hard kick to his groin by Ginger after he unwittingly mentions that he is now possessed by "The Master" and has a penis. The low blow causes her to be released from Baby Oopsy Daisey's grasp, giving Brick the opportunity to quickly summon his gun where he then shoots the bewildered Baby Oopsy Daisey several times, killing him. Brick continues to call the police and tells them that Judith Grey died in the line of duty, and leaves, along with Nurse Ginger to a cab that is on its way back to Pahoota.
In 2004, the puppets along with the formula are now in the ownership of Andre Toulon's great-grandnephew Robert Toulon and his daughter Alexandra. Robert and his daughter are both very brainy and very childlike and collect, fix and build dolls and puppets for a living. Ever since Robert inherited his great-grandfather's puppets he has been trying to create his own life force potion based on Toulon's diary entries using alcohol and blood (which according to Robert and Alex is sacred). One Christmas Eve Alex and Robert finally figure out how to make the potion and bring the puppets to life. Toulon explains to the awakened puppets who he is and they are quick to accept their new master.
Meanwhile an evil toy manufacturer Erica Sharpe was apparently a spoiled child with a father who owned a toy factory and would do anything for her. When she begged her father for him to get her toys that live, when he couldn't get them he tried to live up to his goal as a nice father and went to the length of getting in contact with Bael (the demon of wealth and profits) in which he made a deal to have toys that live in exchange for his soul. The toys which he was given were found in the darkest corners of hell and had previously raised a lot of havoc elsewhere. After Erica's father dies, the toy company is handed down to her. After getting fed up with her rude toy companions who fail to behave or follow any of her orders, she does some research and uncovers Andre Toulon's epic tale and learns of the living, loyal puppets who are now in the hands of a former employee at her toy factory that she fired: Robert Toulon. She has had a secret spy camera in the Toulon residence for a long time and after watching Robert and Alex finally find the formula and bring them to life, she orders a team of thieves to break into the Toulon residence and retrieve the puppets, but when they do the puppets put up a fight and the workshop is set ablaze where the puppets are burnt by the accident from Six Shooter.
Robert fixes up the puppets with new cyborg parts and powerful new weapons which will come very much in handy.Meanwhile, Erica leads a girl into her trap, by convincing her to open a Jack in the box, only to find out it is Jack Attack. The girl is then tortured by the toys, making Oopsie Daisy rip open her shirt and bite at her breasts. She is then lead to an iron maiden, and forced in there. Ericas servants activate the trap, and the spikes move forward and kill her. Her blood goes into a well which triggers a demon. Erica becomes bored of life and has another evil plan up her sleeve, using the help of a certain demon she mass-markets demonic toys which appear harmless on the outside, but on Christmas Day all the toys will awaken and kill. When Bael learns of Erica's obsession towards Robert Toulon's puppets he remembers that centuries ago a doctor by the name of Shaun Paul Toulon made a deal with him that he'd hand over his soul for the secrets of alchemy but after Bael came to collect the soul it had apparently wandered deep into a black forest and become lost and entangled with an ancient oak. That very tree was the one Andre Toulon used to carve his first retro puppets.
Still being a selfish unforgivable demon like Bael, Sean Paul Toulon's debt still needs to be paid off so he makes a deal with Erica that in exchange of Alex Toulon's life he will let her keep the Toulon puppets and bring all the evil toys to life. Robert Toulon discovers the spy camera and has the idea that the thieves who broke into his workshop are connected with Sharpe toys, he goes over to the factory to see what is going on, there he is ambushed by an evil living Baby doll, named Baby Oopsie-Daisy. On Toulon's return he discovers his daughter has been kidnapped. Robert assist the help of a friendly police officer Sargent Jessica Russell who on Christmas Day with the puppets break into Sharpe toys and have a final fight with Erica Sharpe and her demonic minions and Toulon and his loyal puppets. The demonic toys are no match for the puppets and quickly dispatched.
Robert frees his daughter from the hands of her evil kidnappers and at sunrise Erica fails to live up to her deal to bring Alex Toulon to Bael so instead of bringing the toys to life he takes Erica back to his kingdom in hell where she will become his loyal slave for all eternity, after that, Pinhead was wounded. Saving the day and perhaps the world, the Toulons, their puppets and Jessica head off into the sunrise singing and going out for a Christmas dinner. At the end Baby Oopsy Daisy somehow survived in the well and says "Merry Christmas my ass, and a crappy New Year!" He then pops down.
Baby OD is vulgar, perverted, vicious, and insane. He is also extremely tough, tolerating pain, and even when he faces death, he just laughs it off. However, he disliked being burned, stating that it "fucked up his make-up". The box art seems to suggest he is in a relationship with Mr. Static. He also seems to have an affinity for the robot.