Although the film was not a box office success and its release overshadowed by that of the similarly-themed Goodfellas, it was received positively by most critics. Shot on location in New York City, the film was inspired by the real-life Hell's Kitchen gang The Westies.
Terry Noonan returns to Hell's Kitchen in New York City after a 10-year absence, where his unpredictable childhood friend Jackie Flannery is involved in an Irish crime organization run by his older brother Frank. Terry also rekindles an old relationship with Jackie's sister Kathleen.
Terry is actually working as an undercover cop, and confesses it to Kathleen, who is reluctant to have anything to do with him after being told by her brother Frank that he is now a member of his gang for killing two people, although he explains it was staged with his undercover boss Nick, firing only blanks.
Jackie is drinking in a bar one night when three members of a rival Italian gang enter. He snaps, and ends up killing all three for intruding on his gang's territory; he also suspects their involvement in the killing of his friend, Stevie. Soon, Frank is summoned to a meeting by the Italian Mafia boss Borelli and is instructed to kill his brother Jackie, who has become a "thorn" in "our side". Frank has told Jackie to lie in wait in case the meeting goes wrong and becomes a hit, and only manages to avert a war by hugging the Italian leader outside the restaurant in full view of his gang, causing them to retreat.
Frank arranges for Jackie to collect $25,000 after lying to him that the Italians are actually supporting them and that this is their reward, telling him to go to Battery Park. Terry tags along as Jackie's secret backup, finding that the location has been changed to Pier 84. As they wait at Pier 84, Frank arrives with his top enforcer Pat Nicholson just as Terry has stepped away to frantically phone his handlers to inform them that they have been sent to the wrong location. Frank shoots Jackie in cold blood. The police finally arrive and Terry tells Nick that he is quitting as an undercover operative.
At Jackie's funeral, Terry reveals to Frank that he was at Pier 84, and also hands him his police badge. Hours later, while Kathleen is watching the St. Patrick's Day parade alone, Terry goes to the bar where Frank and his gang are waiting. In a deadly shootout, Frank and all of his men are killed. Having been shot three times, Terry slumps to the floor before the film fades to black.
The film was released on a limited basis on September 14, 1990. First-week box office totaled $179,927 (14 screens).
According to "The Numbers" web site, the film was in circulation a few weeks and appeared on 335 screens in its widest release. Total receipts were $1,911,542.
Ebert believed the difficulty State of Grace had at the box office was due to another film with the same theme being released the same week, Martin Scorsese's Goodfellas.
State of Grace was generally well received by critics. Of the reviews collected from notable publications by popular review aggregator Rotten Tomatoes, the film holds an overall approval rating of 84%. Janet Maslin, film critic for The New York Times, wrote, "Mr. Joanou attempts to capture the sense of place that defines urban crime, and the ethnic and territorial distinctions that give it shape. He is successful much of the time here." Maslin praised Oldman and Harris, writing, "Jackie Flannery is played by the phenomenal Gary Oldman, who since Sid and Nancy has taken on a string of new accents and dramatic identities with stunning ease", and "Jackie's icy older brother ... is played by Ed Harris with an eeriness to match Mr. Oldman's."
Critic Vincent Leo praised Penn's performance, noting, "While Oldman gets the accolades for his energetic performance, it is really Penn's inner demons that provides the film with the right amount of conflict, always letting us be aware that fine lines are the difference between life and death, as well as right and wrong, out in the streets of New York. Is Penn doing the noble thing by taking down the criminals, or is he a rat bastard, disowning himself from the way of life and people who helped him along the way? It's the question that makes him sick to the pit of his stomach, and Penn shows it in his face with almost every scene."
Roger Ebert, film critic of the Chicago Sun-Times, felt the film begins as "original and challenging" but then "turns into a story filled with familiar elements". He nevertheless awarded it three stars out of four and had particular praise for the work of Gary Oldman, writing: "Oldman's performance in the movie is the best thing about it...What's best about State of Grace is what's unique to it - the twisted vision of the Oldman character, who lives in a world of evil and betrayal and has somehow thought himself around to the notion that he is doing the right thing."
State of Grace has been recognized as a cult classic.
The original soundtrack was released on October 1, 1990, by MCA. The CD has eighteen tracks, is 53:45 in length, and features a score composed, orchestrated and conducted by Ennio Morricone.