The game picks up after Banjo-Tooie, in which Gruntilda's body was destroyed by Banjo and Kazooie. Eight years on, while the pair are kicking back with pizza, video games, and the radio, they spot Gruntilda's severed head making its way back to Spiral Mountain. They're about to fight when the Lord of Games (L.O.G.) intervenes to settle the feud, conjuring a series of worlds and challenges to decide it. He grants Gruntilda an artificial body and restores Banjo and Kazooie's physical fitness — but not the moves from their past adventures.
L.O.G. transports everyone to his headquarters, Showdown Town, and begins the contest: the winner gains ownership of Spiral Mountain, while the loser is doomed to eternal drudgery in his video game factory. As Banjo and Kazooie work to win by completing challenges, Gruntilda — backed by an army of mechanical Gruntbots — uses her powers to thwart them. When Gruntilda and Banjo finally square off for a last duel, L.O.G. steps in once more, packing Gruntilda off to toil in his factory and rewarding the duo by restoring their moves and handing them the deeds to Spiral Mountain. Gruntilda vows that sending her to the factory was a mistake — and that she'll make her own video game.