During the Johnny Sands Dance Contest at TV station KLMN, the lights go out and a giant, shapeless figure briefly appears. When the lights come back on, the station manager, Mr. Stevens, has vanished, and Johnny Sands is found tied up in the back. Johnny blames the escapade on the "Wax Phantom," a figure created by a crank wax sculptor with a grudge against the station. Even though the station safe has been robbed and Mr. Stevens apparently taken as a hostage, Johnny begs the kids not to call the police.
The gang splits up, with Scooby, Shaggy, and Velma setting off to visit the sculptor, Grisby, while Freddy and Daphne go off to investigate the local wax museum. The creepy Grisby tells Velma that he knows what happened at the TV station thanks to his crystal ball, and cheerfully admits to dabbling in black magic. He believes that he has indeed brought the Wax Phantom to life. Velma and the others leave Grisby to head to the museum to warn Freddy and Daphne.
At the museum, Freddy and Daphne have entered through the open front door but are then locked in and chased by the Wax Phantom. Velma, Shaggy, and Scooby enter through a window and find themselves in the monster display room. Fleeing a ghostly hand and ghostly laugh, they run into Freddy and Daphne and find an airline ticket on the floor.
The gang splits up again, with Freddy and the girls falling through a trap door, while Scooby and Shaggy try snacking on some wax fruit. They are interrupted by the Wax Phantom, who catches them after they take a detour through the Topsy Turvey Room. He threatens to turn them into wax creatures.
Freddy and the girls find a satchel full of money down in the secret room; they also find a secret panel that lets them out, and they follow the groans of Shaggy and Scooby. The Wax Phantom places the hapless pair on a conveyor belt that will drop them into a vat of molten wax, but Daphne accidentally reverses the belt, and Scooby and Shaggy escape. A chase ensues.
After they escape from the Phantom, Freddy decides to turn the tables on the Phantom by luring him under a wax shower. Shaggy and Scooby unwittingly act as bait and get trapped in the wax shower along with the Phantom. When the police arrive, Scooby and Shaggy are broken out of their wax prison, and the Wax Phantom is unmasked as Mr. Stevens. He had embezzled a lot of money from the TV station and was planning to flee to South America, leaving the mad Grisby to take the blame for both the theft and the disappearance.