As Sora, Donald, and Goofy return to Agrabah, where they encounter Iago, Jafar's former sidekick. He tells them that he's been redeemed, but they aren't convinced. Iago says that he wants to apologize to Aladdin and Jasmine for helping Jafar. They are assaulted by a horde of Heartless, and there are too many for the trio to deal with. Iago tries to escape in the confusion, but he accidentally knocks some vases and crates over. They fall on top of the Heartless and knock them down, giving Sora and friends a chance to escape. As thanks for his "help," they agree to take him to the palace to see Aladdin and Jasmine, but Sora tells him that he'll have to win them over himself.
At the palace, they meet Jasmine, who expresses her concern for Aladdin. She tells them that sometimes he seems sad and that he goes away for a while. When Iago tries to talk to her, she panics and goes to call the guards. Back in town, they see Abu, who has stolen a black lamp from a local Peddler. Aladdin catches him, takes the lamp back, and gives it back to the angry Peddler. When they ask Aladdin why he's sad, he says that he misses Genie and Carpet, who went off to see the world together. He says that the reason he goes to to town is because that's where all the action is, and it helps him take his mind off his friends.
The conversation is interrupted by Iago, who tells them that he recognizes the black lamp as Jafar's. Abu, who was trying to steal it for this reason, sighs in frustration, as he tried to warn Aladdin earlier, but he didn't understand. They go to the Peddler's shop and try to bargain with him, but Donald boasts and says that they can pay in royal treasure. After realizing how desperate they are to get the lamp, the Peddler refuses to sell it for anything less than a fabulous treasure. When Donald suggests trying to get some treasure from the palace, Aladdin refuses, saying that he doesn't want Jasmine or the Sultan to worry. Iago suggests going back to the Cave of Wonders to get some of its treasure. Though the others are suspicious, they decide to go along with his idea for now.
Sora and Aladdin aren't the first ones who reach the Cave of Wonders; Pete is also there, and he enters before the others arrive. When they reach the end of the cave and find a worthy treasure, Pete eavesdrops and hears them talking about Jafar's lamp. He summons some Heartless to keep them busy so he can get back to Agrabah first. By the time they return with the treasure, the Peddler is being chased by Pete. They head to the palace courtyard, where Pete manages to get his hands on the lamp. He announces his plan to turn Jafar into a Heartless, but he is interrupted by the return of Genie, who mistakes him for Aladdin. Genie hugs Pete so hard that he drops the lamp. He summons a pair of powerful Heartless, the Blizzard Lord and Volcano Lord, but they are destroyed by Sora. His plans foiled yet again, Pete flees the scene.
The group seals Jafar's lamp deep in the dungeon underneath the palace, where they hope no one will be able to find it. Aladdin and Jasmine realize that Iago really does mean well, so they forgive him and let him live with them in the palace. A red jewel that Abu stole from the Cave of Wonders turns out to be what Sora needs to open the next gate. After unlocking it, they bid farewell to Aladdin and friends. With Jafar seemingly sealed away for good, they continue their quest.
Meanwhile, Pluto is snooping around in a mysterious city, when he suddenly spots Axel walking down an alleyway. He enters a corridor of darkness, which Pluto tries to enter, but it closes before Pluto can reach it. He despairs at first, but someone whistles to him and opens another corridor of darkness behind him. He runs into it, and it closes.
Back on Destiny Islands, Kairi is beginning to wonder if she should try and find Sora herself. Axel appears and introduces himself to her. He claims to be an "acquaintance" of Sora's, and he offers to take her to him. His offer is enticing, but Pluto appears and snaps her out of it, causing her to realize that Axel is tricking her. Some Dusks surround the two of them, and the unknown individual whistles to Pluto again, opening another corridor of darkness, which Pluto urges Kairi to enter. Axel tries to send the Dusks after her, but she runs into the corridor of darkness opened by the whistle.
Kairi and Pluto find themselves in a strange tunnel. They hear the whistle again, and this time a portal of light appears. They both run into it, but Kairi suddenly feels a presence behind her. She turns around to see someone wearing one of Organization XIII's black cloaks, but before she can approach him, the portal closes on her. When she comes to, she finds herself and Pluto in Twilight Town, in Hayner, Pence, and Olette's "usual spot." Meanwhile, Chip and Dale report to Sora and friends that Twilight Town has reappeared on their radar. They will be able to return their soon, but first they have a few more worlds to visit...
Tropes relating to Agrabah
- Adaptational Jerkass: The Peddler* from the start of the movie is more amoral and greedy in this adaptation, demanding a "Sultan's treasure" in exchange for Jafar's lamp, and taking a bribe from Organization XIII in Act Two.
- Arc Hero: A mixed bag, as both Aladdin and Iago both fill this role at certain points. Aladdin is the Guest-Star Party Member, of course.
- Arc Villain: The Peddler. He refuses to sell Jafar's lamp unless Sora brings him tresure suitable for a Sultan.
- Big Damn Heroes: Genie returns just as Pete is ready to free Jafar and doom Agrabah.
- Evil vs. Evil: Pete and the Peddler end up gunning for Jafar's lamp in the end; Pete so he could make an Elite Heartless out of Jafar, the Peddler because the lamp will bring him riches. Iago swipes the lamp as they fight, but crashes into a wall, allowing Pete to reclaim it.
- Heel–Face Turn: Iago insists he's turned over a new leaf, but everyone remains wary of him. Act Two shows Iago did mean it.
- Kick the Dog:
- Iago accidently does this to Jasmine by suggesting Aladdin is cheating on her. Jasmine storms off in rage, and Sora calls Iago out on the comment.
- Once Pete learns that the Peddler has Jafar's lamp, he sends a Heartless ambush on the party as a distraction.
- Mistaken for Cheating: When Jasmine points out how Aladdin keeps running off into the streets every day, Iago suggests he could be having an affair. This upsets Jasmine into running off into the palace, although it's more because she's still thinks Iago is untrustworthy than the idea of her being cheated on.
- Mistaken Identity: Genie mistakes Pete for Aladdin when he returns to Agrabah. Aladdin himself has to clarify Genie's mistake.
- Sealed Evil in a Can: The conflict of this episode is buying Jafar's lamp from the Peddler before someone else does, knowing Jafar would bring The End of the World as We Know It if he's set free.
Tropes relating to the ending cutscenes
- A Day in the Limelight: For Kairi and Axel.
- Deal with the Devil: Axel offers to take Kairi to Sora, but she senses he's using her as bait, and escapes with Pluto.
