Plot
Understudy Karlo Babić meets with a contact to buy smuggled cosmetics from Central City to deliver to theater actor Tolliver Kingston. Kingston has Karlo try the cosmetics on himself first, but the products deform Karlo's face and render him comatose.
Six months after the Joker's death, billionaire Bruce Wayne, who also secretly moonlights as the vigilante Batman, has opened and funded the Smylex Ward of the Gotham General Hospital to treat the survivors of the Joker's Smylex attack, among them Karlo, and headed by Dr. Hugh Auslander. Gotham, however, continues to be plagued by the Joker's former henchmen, now known as The Last Laughs, led by Lawrence and secretly backed by business mogul Max Shreck, who seeks to take advantage of the unrest in the city and gain more power and influence while himself working with an unknown partner communicating with Lawrence via tapes on a boombox. Karlo eventually regains consciousness and finds his face severely deformed but with the ability to morph it into any shape he desires. He escapes from the hospital and Auslander alerts the police. Batman confronts Karlo on a runaway bus but Karlo escapes; he is dubbed "Clayface" by the media. Determined to know what has happened to him, Karlo feigns a phone call from District Attorney Harvey Dent to get Auslander out of the hospital and impersonates Auslander to get into his office to see his files. Auslander returns and meets Karlo, who realizes that the Smylex caused his condition. Karlo rejects Auslander's offer of help and flees again.
Karlo takes revenge on Kingston by locking him in a trunk and impersonating him onstage at a theater play and insulting the audience to ruin Kingston's reputation. Kingston loses consciousness in the process due to asphyxiation, and Karlo calls Auslander in a panic, but Kingston does not survive. Auslander promises Karlo protection and a cure for his condition in exchange for favors to help in his research. Auslander takes control of the Last Laughs by having Karlo pose as the Joker and threaten Shreck into compliance, and send a panic throughout the city by appearing as the Joker on television and threatening mass bank robberies.
Bruce, who has himself been plagued with nightmares about his confrontation with the Joker in Gotham Cathedral despite his butler Alfred Pennyworth's attempts to placate him, investigates Joker's apparent return alongside his new ally, Commissioner James Gordon. They find the Joker's grave empty and his body apparently dumped nearby, but the body is later identified at the morgue as that of Dr. Athur Davis, the surgeon who treated Joker's face shortly after his fall into the acid in Axis Chemicals. With the Joker's body missing, Batman and Gordon assume that the Joker has truly survived and returned. Vicki Vale returns to Gotham to help Bruce's investigation along with Alexander Knox. Piecing together clues sent anonymously from Gotham Globe reporter Norman Pinkus, Bruce realizes that Auslander is actually Dr. Hegesias "Hugo" Strange, a scientist who has worked for several governments (under a number of aliases) with the basic ingredients for what eventually became Smylex, coinciding with Auslander revealing his identity to Karlo and Lawrence and the man communicating with Lawrence on the boomboxes, as well as having secretly helped Lawrence escape police custody. Karlo begins to doubt his allegiance to Strange, who subdues him into obedience via hypnosis and has him pose as Bruce to organize a charity play at the Imperial Theater with Gotham's elite attending. On the night of the bank attacks, Batman stops the goons but finds no evidence of attempted robbery, and realizes that the robberies were merely a ruse to keep him and the police distracted long enough for Strange and his men to break into Gotham Armsgard, where Strange's research has been kept. The Last Laughs massacre the guards and steal the items, but Karlo manages to fight off his hypnosis, horrified by the murders. Strange abandons Karlo. Batman pursues Strange into the sewer, where Strange reveals that his life's work was Project Hegemon, intended to create a superior race of beings which he dubs Monster Men. Having already used Hegemon on several Last Laughs, Strange sets a group of Monster Men on Batman, who only barely manages to escape with help from Karlo. Batman reveals to Karlo that Strange has merely been using the Smylex Ward as a cover for his own research and the patients as his pawns, including Karlo, and also reveals that Kingston actually died of a fatal drug overdose secretly administered by Strange to frame Karlo and coerce him into working with him. Karlo swears revenge and leaves, with Batman unable to pursue him from exhaustion.
On the night of the charity play, Karlo confronts Strange but is knocked out by Lawrence and locked in the same trunk as Kingston's, though he manages to escape via its secret disappearing act lock. Strange plans to hypnotize the audience and unleash Hegemon on them in order to ransom the city, but Batman foils the attempt. Strange flees and takes Alfred and Vicki hostage to the cathedral, where he has stored emergency Hegemon canisters to infect the entire city. Batman and Karlo work together to destroy the canisters from Batman's new Batwing, the Alpha Bat, and confront Strange at the top of the cathedral. Lawrence flees while Karlo, disguised as Batman, subdues the Monster Men and sprays Hegemon gas in Strange's face, damaging Strange's body and brain long enough for Karlo to knock him out. Karlo almost throws Strange to his death, but relents at Batman's insistence.
In the aftermath, Karlo poses as Strange to confess his crimes to Gotham and promise a cure for the Smylex victims and the Monster Men. Strange is sent to Blackgate Infirmary for treatment followed by prison. Karlo turns himself in for his role in Strange's crimes while promising to cooperate in exchange for a cure, the Smylex Ward having received a large donation from Shreck, though Bruce remains wary of Shreck's true motives, suspecting him of having been working with Strange. The Joker's corpse is found in the basement of the Last Laughs' local tavern, confirming his death. Despite her lingering feelings for him, Vicki accepts that Bruce will never abandon his crusade as Batman, and leaves Gotham for good. As Bruce and Alfred go over schematics for a more amphibious vehicle, Bruce receives a postcard containing a riddle implying that the sender, apparently Pinkus, was responsible for saving him from the Monster Men in the sewer. Bruce resolves to investigate both Shreck and the riddle at a later time.
