The game's platform format was a departure from the original ToeJam & Earl, a treasure hunt game with randomly generated levels, inspired by the game Rogue. Creators Greg Johnson and Mark Voorsanger originally began designing a game built on the concepts of the original, but changed to a more generic type of game due to a lack of support for their vision on the part of Sega. The game was critically well received, with reviewers praising the graphics, soundtrack, fluid action and two-player mode. It was also a commercial success, but fans of ToeJam & Earl were disappointed and confused by the radical change in direction.
Since its release ToeJam & Earl in Panic on Funkotron has been criticized for being too sharp a departure from the first game, and some later reviewers felt that the developers had been more interested in the publisher's wishes than the fans. Johnson and Voorsanger have stated they regret moving away from their prototype sequel in the vein of ToeJam & Earl. Research has suggested that a significant minority of fans favor ToeJam & Earl in Panic on Funkotron as the best in the series. Together with its predecessor, the game comprises one of the Mega Drive's "key exclusive franchises", which eventually spawned a third installment in 2002, albeit a commercial failure with mixed reviews. ToeJam & Earl in Panic on Funkotron was re-released in 2007 for the Wii's Virtual Console, receiving mixed reviews. The game was released on PlayStation Network and Xbox Live Arcade alongside its prequel in November 2012. In August 2014, ToeJam Earl 2 was listed on GamesRadar at #10 on "Best Sega Genesis/Mega Drive games of all time".