First of all, yes, there are some major timeline issues established here. Toulon commits suicide in the first film in 1939 - a couple years before this film takes place. Not sure how they could have missed that one, but they did. Also, just before Toulon kills himself, he is working on creating Jester, and Blade seems like the established leader of the pack. However, in Toulon's Revenge, Jester already exists and Toulon does not build Blade until near the end of the film. I don't have an explanation for either one of these oversights except laziness or just outright not giving a shit and thinking audiences wouldn't notice.
This is so weird, I'm actually really getting into these movies now, and I totally did not expect that. Puppet Master is not the greatest series of films so far but it's definitely getting better and it's definitely interesting. Toulon's Revenge is the best out of these first three, mostly because it does not have uninteresting and unimportant characters to follow and not care about. The story seems to work best when it is directly focused on Toulon and his puppets, so hopefully the latter movies will follow this same formula.