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When Guybrush meets Wally in Monkey Island 2: LeChuck’s Revenge, he is living in Woodtick on Scabb Island, as a cartographer. He, like Guybrush, in interested in the fabled treasure of Big Whoop however, his research has been stopped by the Largo Embargo. Guybrush lifts the embargo and after gaining the 4 pieces of the Big Whoop map, asks Wally if he’ll put them together. Wally agrees but only if Guybrush runs an errand for him.
During this time, LeChuck’s forces kidnap Wally and it is up to Guybrush to rescue him. Duing the rescue attempt they both end up in a room full of dynamite which Guybrush detonates, blowing him to Dinky Island and leaving the audience unsure as to what happened to Wally.
The Curse of Monkey Island
It is revealed in The Curse of Monkey Island that Wally never actually escaped and eventually became Bloodnose the Pirate, working under Lechuck. His duty was to guard Guybrush to stop him escaping, however, upon realising he cannot do this, he falls to his knees sobbing.
When Guybrush destroys LeChuck’s ship Wally gives up the pirate life and makes his way to Plunder Island.