Sonic and Tails are warped to the past by the Death Egg, where they fall into the lake the Death Egg was launched from, which is also the location that Scrap Brain was in the first game. The lake gets blasted by the Death Egg, causing a massive hole that the water spills into, and also reactivating the dormant volcano. Sonic and Tails will have to try to catch up to the Death Egg and stop the destruction it causes.
Music from John Tay's Sonic and Knuckles alternate soundtrack