Tired of having to deal with Slappy the Dummy constantly ruining their ventriloquism act, Jimmy O'James buys a replacement dummy that looks identical to Slappy named Wally. He reveals that Wally was created by the same evil toymaker that created Slappy. As Jimmy begins to read a spell to put Slappy into a permanent sleep, Slappy begs for his life. Jimmy gives Slappy one last chance, telling him he must perform three good deeds within a week. He then gives Slappy to a girl named Georgia Boonshoft, much to the annoyance of her sister Stella.
As Slappy tries to do good deeds however, his work continues to be sabotaged. From trying to clean Georgia's room, to helping Georgia babysit. Slappy begins to suspect that it is all the work of Stella. However, when Georgia takes Slappy to school with her, he soon discovers that it was Wally who was behind the sabotage. The two dummies fight in the cafeteria until Georgia grabs the both of them and throws them into the garbage disposal. Slappy wakes up, realizing it was all a nightmare. However, Wally's crate enters the dressing room as Jimmy tells Slappy that some nightmares do come true.
Wally, much like Slappy, is a mischievous dummy who throughout Slappy's dream gets Slappy into in more and more trouble. It is unclear if this is an extension of him being evil, or if he was instructed to do so by Jimmy O'James to ensure Slappy wouldn't win the deal.
Wally is an exact replica of Slappy. He has the same brown hair and blue eyes that Slappy has.