At the President's Dinner event, Madison decides that she needs to tell Allen everything, and asks that they go outside. Kornbluth has been arrested and is being taken away for acting suspiciously when he spies Madison. He manages to wrestle with the security guards and get her legs wet - turning her into a mermaid.
Allen and Madison are kept locked up in a secure facility, where they both undergo a range of tests. When they finally realise that Allen is just a man, he is bundled out of a van outside his apartment block. Rescued by his brother from a hoard of reporters, Allen moans to Freddie that he has always been unlucky in love, and this was the worst yet as he thought she was 'the one' ... and not a fish. Freddie is angry - and tells Allen the truth, that it doesn't matter if Madison is a mermaid, what they had was love and his brother was the happiest he has ever been.
Meanwhile Kornbluth has been marginalised by Dr Ross who has taken over the experiments, and doesn't care for Madison's well-being. Kornbluth can't take it any more and gets to the dentist for a major operation - but doesn't want to take any anaesthetic as he 'doesn't deserve any'!
Allen enters the surgery and demands that Kornbluth tell them where Madison is being kept. With Freddie, the three men enter the secure facility (with Allen and Freddie posing as Swedish experts due in that day), and get to see Madison. Allen apologises for leaving her.
Suddenly Kornbluth bursts out the secure room and tells the guard that 'the mermaid' has burned one of the Swedish doctors with an x-ray laser from her eyes! He tells him to lock down the facility. Kornbluth and Allen then carry a body (much longer and thinner than John Candy's!) out the room wrapped in white sheets.
Soon, Dr Ross enters the facility with the real Swedish doctors - they find Freddie, alone, fishing in Madison's old tank. They sound the alarm.
Allen, Madison and Kornbluth are chased through the city streets by the army. Kornbluth gets out the car to help them, but the army just knocks him aside.
They get to the docks. Allen tells Madison to go as they'll never stop chasing her. Madison tells him that she was the little girl he met all those years ago - and that he can go with her, but he could never go back. She dives into the water alone - but a chopper flies over the waters.
Allen screams for them to leave her alone - and then dives in after her. He starts to drown but is rescued by Madison - as other divers swarm around them. Allen can breathe underwater when he is near her, and kissed by her. They defeat the other divers, and then Madison swishes her tail and takes them away.
In the credits they swim out to the ocean, past a few shipwrecks ... and on to an underwater city!