-LAPD Homicide Det. Sgt. Roger Murtaugh(Danny Glover) is worried about getting old, recently celebrating his 50th birthday. He gets a message from Michael Hunsaker(Tom Atkins), an old Vietnam War vet and friend who Murtaugh realizes he has not seen in over 12 years. Before meeting him, he is called to investigate a suicide and learns that the victim is Hunsaker's daughter Amanda, who in a drug rage, jumped off the balcony of her apartment. Elsewhere, Narcotics Det. Martin Riggs(Mel Gibson), who is a suicidal loose cannon following the death of his wife in a traffic accident, nearly kills an unarmed suspect after flying into a psychotic rage during a drug bust. Knowing his behavior, Riggs' bosses transfer him to Homicide, making Riggs and Murtaugh unfortunate partners
-Amanda's autopsy reveals that she took drugs laced with drain cleaner. Even though she jumped to her death, she would have died within minutes anyway. After telling her father, who says he was trying to help Amanda get out of the world of drugs, prostitution and hardcore pornography, Riggs and Murtaugh question a pimp she was connected to. They find a drug lab on the premises, and they engage in a short gunfight. This kills the pimp. Murtaugh assumes the case is now closed but Riggs finds it suspicious that the only witness to the suicide was a prostitute named Dixie(Lycia Naff) who was working away from her usual "Stroll". They both suspect that Dixie poisoned Amanda and posed as a witness to cover the crime.
-Riggs and Murtaugh head to Dixie's home to question her, but her house explodes as they arrive. Riggs- who served in the US Army Special Forces during the Vietnam War- finds part of the bomb, a mercury switch which only a professional would use. A neighborhood boy remembers seeing a man with blonde hair at her house earlier who had a Special Forces tattoo similar to Rigg's. Seeing a connection, they suspect Hunsaker knows more and Murtaugh confronts him. He admits that for more than 2 years he was involved with a heroin-smuggling operation run by ex-special operations troops from the Vietnam War, known as "Shadow Company". This is run by a retired general named Peter McAllister(Mitchell Ryan) and his chief Mr. Joshua(Gary Busey). Hunsaker was laundering the money through his bank. McAllister ordered Amanda's murder when Michael unsuccessfully tried to alert Murtaugh to the scheme in order to get out. As Murtaugh attempts to make Hunsaker reveal the operation, Joshua makes a surprise appearance in a helicopter and shoots Hunsaker, killing him.
-As Riggs and Murtaugh attempt to investiaget Dixie's connection, Shadow Company forces attempt to kill Riggs and kidnap Murtaugh's daughter Rianne(Traci Wolfe). Murtaugh meets Shadow Company in the desert to exchange himself for Rianne. As Riggs provides cover fire from a sniper rifle, Murtaugh tells Rianne to run, but all 3 are captured. McAllister tortures Murtaugh and Riggs for info. Riggs frees himself, then frees Murtaugh and Rianne. They escape their prison and discovers it leads to a nightclub in downtown L.A. Riggs chases Joshua on the street and attempts to cut him off on the freeway, but he escapes. When Murtaugh takes out McAllister's driver, the car crashes on Hollywood Boulevard and is destroyed by a live hand grenade. Riggs and Murtaugh go to his home, knowing Joshua will go there to attack Murtaugh's family. While Joshua is arrested and led away, Riggs ,wanting revenge, proposes "A Shot at the Title which Joshua accepts. Agreed by Murtaugh, the 2 fight hand to hand combat on the lawn, and when he attempts to shoot Riggs, him and Murtaugh open fire, killing Joshua.
-After visiting his wife's grave, Riggs goes to Murtaugh's house for Christmas Day. Riggs brings his dog Sam to be a friend to the Murtaugh family cat, Burbank. He also gives Murtaugh a gift: the unfired, hollow-point bullet which he had been saving to commit suicide.