Wayne's accountant Reese appears on a news show claiming to be able to tell the world who Batman is. He tells Gotham that he is going to reveal Batman's identity, but before he can, the Joker calls in to the show saying that he doesn't want this lawyer to ruin his fun. He says that if the lawyer is not killed within 60 minutes, he is going to blow up a hospital. This triggers the police to rush in and protect the lawyer, and try to carry him to safety.
At the same time, other police are evacuating all of the hospitals in Gotham City. When they get to Gotham General, a police officer attempts to evacuate a nurse in Harvey Dent's room, which then turns out to be the Joker, and he kills the cop. He then explains to Two-Face how he needs to introduce a little anarchy and chaos, how easy it is to bring down all the good people in the world and how it's all fair.
Joker unties Two-Face and hands him a pistol. Two-Face, bent on revenge and now believing everything in the world should be decided by chance, flips the double-headed coin to decide whether or not to shoot Joker which Joker agrees is only fair. Though we don't see it, the coin obviously lands on the clean side since the next scene shows Joker leaving Gotham General Hospital as it blows up in the background.
Afterwards, the Joker appears on TV again, forcing kidnapped GCN reporter Mike Engle to read out his plans. He reads that Gotham City now belongs to the Joker, starting that very evening. Anyone that doesn't want to be a part of his game should leave now, but they are going to have a hard time leaving the city by the bridges. He alludes to the fact that something big was going to happen that very night.
During which, Two-Face enters a local bar where Detective Wuertz - the 'dirty' cop that had picked him up after the Joker was captured - hangs out. After questioning him, he flips the coin which lands on the dirty side and he kills Wuertz. At the same time, Batman uses Fox's 'cell phone sonar' technology to somehow turn every single cell phone in Gotham into a sonar device, giving him the opportunity to spy on everyone in Gotham.
He calls Fox in, and tells him to monitor the screens, and give him updates on the Joker's location when he sees him. Fox is appalled that Batman would use his technology to spy on the citizens of Gotham and reluctantly agrees to help, stating that the machine must be destroyed after the Joker is captured or he will have to retire.
Two-Face continues to question mob members, trying to uncover the identity of the dirty cop that kidnapped Rachel. When confronting Maroni in Maroni's car, he learns that the other cop is Ramirez. He then flips the coin for Maroni, which lands on the clean side. "Lucky Man," he remarks before he flips it again.
It lands on the dirty side and he buckles up and states, "But he's not" as he shoots Maroni's driver, causing the car to veer off the road and crash into the dockyards. Meanwhile, two large ferries leave Gotham due to the Joker's threats. One is inhabited by criminals that Harvey and Gordon helped put away, the other is packed with innocent citizens - the city's bridges apparently being wired with explosives.
While sailing off, the two boats completely lose all power and their engines die. Both ships eventually realize that there are explosives strewn all about the boat, and they both find detonators. It is at this time that the Joker's voice is heard over the loudspeaker of both ferries, and he informs them that they are part of a social experiment. The detonator on each boat is for the other boat.
One ferry must press the button and destroy the other boat by midnight, or else the Joker will destroy both boats. This brings about much chaos in both boats, and a lot of soul searching about morality and about if anyone could actually do such a thing.
Fox finds the Joker, who is holed up in a building still being constructed with many clown guards. Batman notifies Gordon of the location, and speeds off towards the building. Meanwhile, Two-Face forces a frightened Ramirez to call Gordon's family and tell his wife and children to meet her at the exact spot where Rachel was killed. They believe her because they trust her.
Afterwards, Two-Face, angered with Ramirez's pleas to spare her life for the sake of her sick mother, flips for Ramirez's life. The coin lands on heads, so he just knocks her out, telling her that she "lives to fight another day." As Gordon arrives at the building where the Joker is, he gets a call from his family telling him they are being held captive by Two-Face in the place where Rachel was killed.
Gordon rushes off to save his family as Batman breaks in to the building. After realizing that the clown guards are the actual hostages and the doctors/hostages are the Joker's goons, he beats down some SWAT members in order to prevent them from killing the clown guards, and he disables the goons as he makes his way up to the Joker's location.
When he finally confronts the Joker, the Joker sends the Chechen's rottweilers after him, and while Batman fights them off, the Joker beats him brutally with a blunt metal object, and eventually throws him close to the edge of the building, trapping him under a metal beam.