Tired of dealing 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 pleads with Jimmy to spare him. Jimmy gives Slappy one last chance, telling him he must perform three good deeds within a week. He then gives Slappy to an enthusiastic girl named Georgia Boonshoft, much to the annoyance of her younger sister Stella.
As Slappy tries to do his good deeds however, his hard work constantly winds up sabotaged. From trying to clean Georgia's room, to helping Georgia babysit. Slappy begins to suspect that Stella is the culprit. 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 case enters the dressing room as Jimmy tells Slappy that some nightmares do come true. Before Slappy can react, Jimmy reads the magic words.
Wally, like Slappy, is a mischievous dummy who enjoys getting Slappy in trouble. However, it is unclear if this is an extension of him being evil, or if he was instructed by Jimmy O'James to sabotage Slappy's good deeds to ensure Slappy wouldn't win in the end.
Wally is an exact replica of Slappy. He has the same brown hair and blue eyes that Slappy has.