All has been well in Wasteland since Mickey Mouse saved it from destruction by the Shadow Blot, with the world's inhabitants beginning its restoration, but a series of earthquakes have been occurring lately. The Mad Doctor, who survived his previous defeat and mostly communicates by singing, arrives and asks Oswald to join forces with him in order to save Wasteland. Not trusting the Mad Doctor, Gus, the leader of the Gremlins, and Ortensia, Oswald's wife, contact Mickey, who enters Yen Sid's workshop once more and takes the magic paintbrush to aid him as he enters Wasteland. Oswald joins up with them in Dark Beauty Castle, explaining the Mad Doctor warned him of the Blotworx - Blotlings piloting Beetleworx-like machines. The castle begins collapsing from an earthquake, forcing them to escape; Oswald retrieves his powerful remote en route.
Mickey and Oswald arrive in Mean Street, which has been split in half by the earthquake, where Gremlin Jamface advises them to fix the disabled projectors via their control station in Rainbow Falls. They fight their way through Wasteland, fighting various Blotlings, Beetleworx and Blotworx. After heading to the Mad Doctor's lab in Disney Gulch and defeating a Blotworx dragon, they find out the projectors were intentionally sabotaged with evidence pointing to fellow gremlin, Prescott, who has been acting strangely. The group follows him to Fort Wasteland, an area that was seemly destroyed during the Blot's revolt, and help one of the Lonesome Ghosts befriend the local Blotlings, whom he believes are just misunderstood. They are then led to the Floatyard, where they find Prescott has built a massive robot designed after him, which he uses to attack the group. Destroying or trapping the robot, Mickey and Oswald try interrogating Prescott, only to have Animatronic Daisy Duck's news team and the Mad Doctor arrive. The Mad Doctor seems to put Prescott in a hypnotic trance, making him confess to being behind the chaos which convinces everyone except for the duo. The Mad Doctor later announces he will be building a new attraction as a victory celebration. The toons of Wasteland begin to accept him as their leader instead of Oswald, to the latter's dismay.
Concerned, Mickey and Oswald follow the Mad Doctor's trail through Ventureland to his hideout, which leads them through Autotopia, another area that was also supposedly destroyed during the Blot's revolt. While traveling through a projector leading to Lonesome Manor's attic, they learn what happened to the Mad Doctor after the events of the first game; he crash-landed in Disney Gulch and set up his new lab there. It is also revealed that he was the one who created the Blotworx (made from Spatters and cars from Autotopia), but was forced to cast them out due to their hostility. After saving a captured Jamface, they find the Mad Doctor's diary, from which they learn that he convinced Prescott to build him a special device to broadcast a show called The Mad Doctor's World of Evil into Mickey's world where its ratings there would bestow upon him a new heart, allowing him to leave Wasteland. He also manipulated Prescott into sabotaging the projectors to keep anyone from reaching Autotopia and discovering his scheme. Wanting to become a toon again after learning that he was falling apart due to his toon parts interfering with his animatronics, the Mad Doctor began using his technology to enslave the Guardians, the primeval spirits of Wasteland, which has been the cause of the earthquakes all along. They confront the Mad Doctor at his attraction, now revealed to be a doomsday device used to destroy Wasteland, where he demands the brush from Mickey in exchange for their friends whom he has kidnapped, but Oswald prevents this from happening as it will make him unstoppable. They defeat the Mad Doctor, whose robotic body finally gives out and is either defeated or redeemed depending on which path was taken in his fight. Afterwards, all of Wasteland celebrates Mickey and Oswald's triumph with a parade highlighting the duo's major choices throughout the game.
Meanwhile, the Petes of Wasteland (with Petetronic being present if the thinner path was taken) kidnap Prescott, presumably having plans for both him and Wasteland.