Almost a year after Jafar's defeat, Aladdin, Scott Weinger and Abu have settled into the Palace of Agrabah with Princess Jasmine Linda Larkin and her father, the Sultan Val Bettin. Yet the spark for adventure remains, as Aladdin boldly foils a criminal group led by Abis Mal Jason Alexander and returns their stolen loot to the grateful citizens. In the desert, Iago Gilbert Gottfried escapes from Jafar's lamp and, weary of Jafar's abuse, refuses to free his old master, dropping the lamp into a well.
Iago flies back to Agrabah, hoping to rejoin the palace life by befriending Aladdin. In their first encounter, the trio is attacked by Abis Mal and his henchmen, and Iago unintentionally saves Aladdin's life. Grateful, Aladdin allows Iago to stay at the palace, promising to speak with the Sultan about granting Iago a reprieve. Abis Mal later discovers Jafar's lamp in the well and frees him, but Jafar—hampered by his bungling new master—manipulates Abis Mal into wasting wishes and schemes to take revenge on Aladdin.
Meanwhile, the Genie [Dan Castellaneta] returns to the palace after a year away, his powers diminished from being freed. At a banquet, the Sultan announces Aladdin as the new Royal Vizier; the celebration is interrupted when Jasmine's tiger Rajah chases Iago into the festivities, prompting tension. Jasmine is irked that Aladdin didn't confide in her about Iago, but the Genie and Iago work to mend their relationship. The Sultan, though still wary, temporarily pardons Iago and asks Aladdin to keep a watchful eye on him. Jafar soon infiltrates the palace and compels Iago to trick Aladdin and the Sultan on a perilous trip to a waterfall.
During the venture, the Sultan ultimately forgives them, but Jafar—transformed into a gang of sorcerer horsemen riding dragon-winged horses—ambushes the party, sending Aladdin into the waterfall while capturing the Sultan, Jasmine, the Genie, and Abu. Aladdin returns to Agrabah to warn Razoul, but Jafar, posing as Jasmine, frames him for murder and sentences him to death. Feeling guilty for his actions, Iago frees the Genie, who saves Aladdin. Jafar now rules over Agrabah, but Aladdin remains determined to stop him, and the Genie reveals that the only way to kill Jafar is to destroy his lamp. Iago, after a moment of doubt, ultimately returns and helps, and is thanked by Aladdin before the final confrontation.
Jafar demands that Abis Mal free him with his last wish, and the two sides converge to seize the lamp. In a climactic showdown, Jafar—now in Genie form—ambushes the group, shatters the magic carpet, and tears open the palace gardens to a pool of lava, trapping Aladdin on a sinking rock. Iago, who has a change of heart, reenters the scene, grabs the lamp but is burned and knocked unconscious, only to recover enough strength to kick the lamp into the lava, killing Jafar and undoing his magic. With Jafar defeated, the palace is restored, the Carpet returns, and Iago is forgiven and welcomed back into the palace. Aladdin, choosing a life of exploration with Jasmine, declines the Sultan's offer to become vizier. In a post-credits moment, Abis Mal realizes he will never receive his third wish.
