The game takes place two years after the witch Gruntilda was defeated by Banjo and Kazooie, at the end of which she was buried alive under a rock with her assistant, Klungo, trying to save her.
As the game\'s one-player mode opens on a stormy night, Banjo, Kazooie, Mumbo Jumbo, and Bottles are enjoying a game of poker in Banjo\'s house, where Bottles and Kazooie continue to lose spectacularly to Mumbo. Meanwhile, a giant drill machine, called Hag 1, is burrowing into Spiral Mountain through the cliff. Those in the house feel the rumbling of the machine and Mumbo goes out to investigate the commotion. Outside, the mischievous goon Klungo is helping Mingella and Blobbelda, rescue their witch sister, Grunty. They succeed in reviving Grunty, although the time she spent underground has rotted off her flesh, leaving her no more than a living skeleton with witch\'s robes. Mumbo witnesses this ceremony, and speeds back to Banjo\'s house to warn his friends. The witches give chase, and Grunty hurls a deadly spell at the house. Forewarned, Banjo, Kazooie, and Mumbo get away in time, but Bottles, suspecting the claim that Grunty is back to be a trick by Mumbo to win the rest of his money, stays put and is caught in the blast. The witches speed away in their Hag 1 machine, and Banjo and Kazooie watch as Bottles wobbles out of their destroyed house and dies at their feet. Shaken, they agree that they must chase down Grunty and foil her plans once more. Mumbo informs them that he will return to his hut and prepare some magic to aid them.
Banjo and Kazooie follow the trail of the Hag 1 to Jinjo Village, which they discover to be devoid of Jinjos, with the Gray Jinjo House destroyed by the Hag 1. Confused, they approach King Jingaling, king of the Jinjos, who informs them that a kickball tournament is to start within the week, but without his Jinjo subjects, he has no team. Banjo and Kazooie agree to help find his subjects, and he consequently gives them a Jiggy (a golden jigsaw puzzle piece) to help them on their journey. Shortly after their departure, we learn that Grunty\'s sisters have created B.O.B. (Big Ol\' Blaster), a tremendous machine that can suck the life force out of people and places. Grunty\'s sisters agree to let her use it, but only if she stops speaking in rhyme. She agrees, and they decide to test B.O.B. on the Jingaling, who is instantly turned into a zombie, with his palace now an ugly grey color. Grunty eagerly states that she wishes to next zap Banjo and Kazooie and the whole island with them, but her sisters inform her that B.O.B. must first charge up, which will take hours to do so. Grunty reassures them that, without King Jingaling or Bottles around to help them, there will not be any way for them to reach Cauldron Keep in time.
Meanwhile, Banjo and Kazooie take a shortcut through Bottles\' house to reach the Isle o\' Hags, where they meet Master Jiggywiggy, a mysterious sorcerer who agrees to help them open up the worlds on the island if they present a proper amount of Jiggies and solve his puzzles. Their adventure thus begins.
On their journey they collect a total of 90 Jiggies, and receive help from old and new friends. They often stumble upon Mumbo\'s hut, where he agrees to go out and use his magic to open up new passageways for them. They also encounter Sergeant Jamjars, Bottles\' soldier brother, who agrees to teach the duo new attacks (if, of course, they can present the proper number of musical notes). They also meet Humba Wumba, a female Native American and Mumbo\'s arch-rival in magic who requests magical Glowbos in exchange for transforming Banjo and Kazooie into something else.
Finally, the pair reaches Cauldron Keep, Grunty\'s castle. After facing her henchman Klungo and taking her \"Tower of Tragedy\" quiz (dispatching of Grunty\'s sisters in the process), they hurry upstairs to reverse the effects of B.O.B., thus reviving Bottles and Jingaling. They then rush to the top of the tower and face off with Grunty in her Hag 1 machine. The duo eventually destroy the Hag 1 with the witch trapped inside as it explodes. The explosion destroys most of her body, leaving her nothing more than a talking skull. Banjo and Kazooie return to the Isle o\' Hags to celebrate with their friends, as well as kicking around Grunty\'s head, much to her own disgust. She vows to have her revenge in the game\'s sequel, referred to as \"Banjo-Threeie\".