It's Christmas Eve, and Sonic and Tails are trudging their way through a bitter mountain blizzard to the cursed Ice Palace, 'the most feared place on all of Mobius' (it was either that, or stay at home with Porker eating all the mince pies). Apparently, none of the explorers who sought it out ever returned, though Sonic doesn't believe that the palace is cursed. As the two cross a bridge over a pool of water, they are suddenly attacked by an enormous sea serpent. The monster easily bites through the bridge, and Sonic tries several spin-attacks in the air, before being headbutted by the monster and sent hurtling into the pool. Tails immediately dives in to retrieve Sonic, and pulls him through a hole in the pool wall to another cavern before the sea-monster can swallow them. After climbing out of the pool they find themselves in a warm, well-lit library, suggesting that someone indeed lives in the palace.
The residents quickly reveal themselves as the long-missing explorers. Their leader, Friday, explains that his team was exploring the Ice Palace when Doctor Robotnik began his takeover of Mobius. Not wishing to be turned into Badniks, Friday and his friends and family decided to lie low in the palace, since its ancient technology provided them with food, warmth and shelter. In order to deal with the attacking Troopers however, the team released the Palace's ancient Guardian from its hibernation, though this action effectively left them trapped in the Palace. Sonic makes plans to go back and beat the monster into submission, but he follows a suggestion from Tails to release it instead, burning a hole into the wall with a "Sonic Whirlwind", allowing the monster to smash through and escape into the ocean. While Sonic doesn't think that releasing a dangerous sea serpent into the ocean is a good idea, Tails reassures him that the Guardian was trapped like the explorers and can now seek out its own kind, which cheers Sonic up somewhat, as now everyone can return home for the festivities.