The special opens up at the North Pole, where Santa Claus and his elves are working on all the toys that Santa will deliver at Christmas. Dr. Claw has managed to sneak into the factory and disguise himself as Santa. He has also managed to install mind-control devices on all the elves, which he then activates and orders them to capture Santa. His plan is to use the mind-controlled elves to make defective toys, for which the world will blame Santa.
Meanwhile, Gadget has been going around with his Christmas doings, completely oblivious to the M.A.D. agents trying to do him in. Later, he visits the local mall Santa, actually Chief Quimby in disguise. He gives Gadget a self-destructing note containing his mission, and, of course, Gadget leaves it to blow up the Chief's face.
Gadget, along with Penny and Brain, heads off to the North Pole, taking with him the assumption that Claw hasn't made his move yet. Upon entering the factory, Gadget firmly believes there's nothing wrong. He doesn't even get suspicious when he's staring the Santa-disguised Claw right in the face. Penny and Brain, on the other hand, aren't so easily fooled. But when they try to tell Gadget about it, he's sideswiped by a claw from the factory and thrown onto the conveyor belt with all the bad toys the elves are manufacturing. When this doesn't finish him off (thanks to Brain's meddling), Claw instead has Gadget dropped down the manhole he dropped Santa through at the beginning. There, Gadget comes upon the real Santa Claus, but arrests him, thinking this Santa is the fraud.
Meanwhile, Penny investigates the factory and sees the elves making bad toys. Penny calls Brain and he tells her that Gadget found the real Santa, but arrested him. However, during this, the elves find her and trap her in the jack-in-the-box. Penny manages to get out of the box and finds out that it has been loaded to the room where Claw hid the real toys. Brain manages to snatch the keys away from Claw and open the cell where Gadget has been interrogating "the fake Santa", using lines of The Night Before Christmas for reference. Gadget mistakes Brain for "the fake Santa"'s accomplice, lassos the both of them, and heads off to tell "the real Santa" he has caught the criminals.
As Gadget helps "Santa" load the broken toys onto the sleigh, Brain springs himself and the real Santa loose, and then follows Penny to the control room that Claw has left vacant. Penny immediately deactivates the mind control on the elves, but Claw quickly gets into his jet and prepares to take off with the sleigh full of broken toys. But the real Santa shows up with his reindeer and foils him by unhooking the sleigh from the M.A.D. Jet. Then, for good measure, Gadget (still not realizing he's been helping his nemesis the whole time) ties the hook to a candy cane prop. The reindeer break up the ice behind the M.A.D. jet, sending him drifting into the distance. After the Chief makes his obligatory appearance to congratulate Gadget and company for saving Christmas, Santa gives them a ride in his sleigh.
- Cree Summer is the only voice actor not to reprise her role from the series. This is mainly because she had been busy with other projects.