Ash and his friends take a boat ride, finally going to Cinnabar Island. However, once there, they meet Gary and his cheerleaders, who explain to them that Cinnabar Island is a tourist resort, and that Pokémon Trainers have not ventured to Cinnabar Island since the days of his grandfather. Ash then discovers that they, indeed, are on a cruise ship. Once on the island, they decide to find the Cinnabar Gym, and thanks to a local (who tells them by using a riddle which Misty eventually solves), they do find it... only to learn that the Gym has been abandoned. The local tells them the story of how Cinnabar Island was once a hotspot for Trainers, but then tourism took off due to the rise of hot springs resorts from the nearby volcano. The Cinnabar Island Gym Leader, Blaine, closed down his Gym due to being forced to battle tourists who had no interest in battling for Badges. The local leaves, but not before leaving a business card with Ash to an inn.
Ash and friends decide that, even if there isn't a Gym, there is still a world-famous Pokémon Lab to explore. There, they too discover that it has been turned into a tourist trap. Finding nothing else to do, they decide to look for lodgings, but find that not only is the Pokémon Center's lodgings full, all of the hot springs resorts have been fully booked, and they are left with no choice but to camp out. Even Gary has found himself a room, but unfortunately for him, his room entertainment is in the form of Jigglypuff (with Hitmonlee and Electabuzz dressed up in costumes playing the shamisen), who puts him, the audience, Hitmonlee and Electabuzz to sleep. When Brock reminds Ash of the business card, they find that it also contains directions there... but in the form of a riddle. Ash and Brock are both stumped by it ("...you will see my hands, or at least my face"), but Misty guesses correctly again (that being a clock). The local, who runs the inn, not only has a vacancy, but allows Ash and company to stay for free.
However, before they can settle in, the local receives a phone call, informing him that the Pokémon Lab, home to various Fighting-type Pokémon, is under attack from a balloon. Figuring that Team Rocket is involved, Ash and his friends arrive at the scene, and quickly dispatch the balloon with help from Pikachu and Pidgeotto (via Pikachu's Thunderbolt from the back of Pidgeotto). As a reward for helping to save the Pokémon, the local reveals a secret: that Blaine had built a secret Gym, in a place where "firefighters couldn't win".
Later that night, as Ash and his friends mull over the riddle in the hot springs, Togepi wanders off from Misty and jumps on a Gyarados statue, unwittingly activating a secret switch that moved a boulder, exposing a cave and knocking down the hot springs' gender divider. After quickly getting their clothes back on, Ash and friends explore the secret cave, and find a metal door that's hot to the touch. Beyond the door, they find a clear battlefield - Blaine's secret Gym, suspended over the Cinnabar Island volcano. The local suddenly appears, revealing himself to be Blaine (as Misty had figured out another riddle, the answer being the wig Blaine used as part of his disguise), and accepts Ash's challenge.
The Gym Battle begins as a three-on-three battle. Confident that the Fire-type leader will use his Fire Pokémon, Ash decides to lead off with Squirtle, while Blaine counters with a Ninetales. Despite the type advantage, Squirtle's Water Gun is no match for Ninetales' Fire Spin, and Squirtle is out in one shot. Deciding to fight fire with fire, Ash decides to use Charizard despite its obedience issues. In response, Blaine pulls Ninetales for Rhydon. However, Charizard simply loafs off as Rhydon was about to unleash Horn Drill, unwilling to battle. Quickly down two Pokémon, Ash decides to rely on Pikachu. Pikachu's Thunderbolt does not faze Rhydon at all, but Ash decides to take advantage of using Rhydon's horn as a lightning rod, and another well-aimed Thunderbolt at the horn knocks it out. However, Blaine isn't fazed, calling out his signature Pokémon, Magmar. Pikachu's electric attacks do not seem to faze him, which, as Brock explains, is due to Magmar using its own body heat as a thermal lance, diffusing the electricity. With Pikachu effectively unable to attack, and Magmar slowly wearing Pikachu out with a series of Fire Punches, the episode ends on a cliffhanger, as Pikachu finds himself facing down Magmar's Fire Blast, while about to back into the lava. Will Pikachu survive?