After being humiliated in school by Francis, and all of his family's possessions stolen, Timmy practices Kung-Fu with his dad and he decides to fight with Francis to regain back his house, his dad's car, and to defend Tootie from Francis.
Francis is beating Timmy up and taking his lunch money in front of the school and his laughing classmates. Tootie charges in and attempts to defend Timmy to no avail, much to his dismay and the amusement of his classmates. Even worse, Timmy's father arrives and attempts to do the same, but fails miserably as he is easily beaten up by Francis, who takes both their lunch money, the family car, and eventually the deed to the Turner's house. Timmy and his family are forced to sleep in his treehouse as Francis moves into the Turner's house, partying and trashing the place. Tootie overhears Timmy and his parents talking with a direction microphone, and offers Timmy a place to sleep at her house, but he hastily declines.
The next morning, Timmy's dad decides he must teach his son to fight his own battles. Mr. Turner gives Timmy a kung-fu book, but Timmy only reads the first line, "Kung Fu must always be used defensively. Never for vengeance", before he tosses the book out the window. Determined to win his dignity back, as well as his home, Timmy wishes Cosmo and Wanda into a magic belt and headband to help him practice Kung-Fu. He travels the city of Dimmsdale and uses his karate chopping skills to help people. Timmy stops at the Dimmsdale Senior Center when he hears an old person calling for help, and uses his karate chopping skills to cut up the elder peoples' steaks. Timmy then walks into a gym and beats up a few random people who were training under Billy Blanks, a fitness instructor, who congratulates Timmy and then makes him do push ups with cinder-blocks on his back.
Feeling that he is ready, Timmy then goes to his house and challenges Francis to a fight. At first, Francis does not want to fight since he cannot win anything from Timmy: he already has his house, his family car, and his dignity. Tootie rushes to Timmy's side having been observing him with a pair of binoculars, points out that his goldfish (Cosmo and Wanda) can still be put on the line, and proudly proclaims that Timmy is going to beat up Francis in the school yard at eight o'clock the next morning. Francis accepts the challenge while Tootie goes to hug Timmy, but he pulls out a restraining order and makes her back away. The next morning, Timmy and Francis meet in the playground to fight. Even with his magic, things are not going well for Timmy (as he is using kung fu for vengeance since he wants to hurt Francis with Kung-Fu), and his parents plead for him to run for his life. Only Tootie shows up to cheer on Timmy, decked out in Timmy Turner merchandise. Tired of Tootie wanting to fight Timmy's battles for him, Francis grabs her and threatens to beat her up instead which shocks Timmy as Francis usually always beats up the boys.
Timmy is reminded by the words from his father's book that Kung-Fu can only be used for self defense, and with his magic now aiding him, he defends Tootie from Francis and gives him the beating of his life, using various elements from the playground (such as tether ball and monkey bars) to his advantage, eventually knocking Francis out by playing his strength against him. Timmy wins back his father's car, mother's house, and earns a big smooch from Tootie, who is even more enthusiastic when she learns Timmy's restraining order on her has expired that she gives him a "kung smooch".
The next day, Francis is seen all bandaged up and cleaning the graffiti he drew on the walls of the Turner house, with Timmy's dad threatening to get his son after Francis if he doesn't clean faster. Francis screams and starts to scrub away furiously. Mr. Turner is happy that he can use his son as a threat now, until Mrs. Turner does the same to him in regards to taking out the garbage. Meanwhile, up in his bedroom, Timmy is remorseful that he only beat Francis using magic, until his godparents remind him that it's no more of an unfair advantage as Francis being freakishly large for his age. Timmy accepts this logic and says "I love you guys" to his godparents, and then goes to give them a hug before Cosmo suddenly grabs him and throws him with a kung-fu move, thinking that Timmy "went for him".