When Timmy wakes up from a nightmare, he is introduced to a Fairy-versary party by all the fairies, celebrating his one-year mark of keeping his fairy godparents a secret. Among the various magical gifts Timmy receives from the fairies, he is given the "Fairy-versary muffin" by Jorgen Von Strangle. When the party is over, Timmy wonders how he obtained fairy godparents in the first place. Wanda tells Timmy it happened with his evil babysitter Vicky, which resulted from his parents' first lie to him. He becomes depressed from the information and wishes his parents would not lie anymore. Consequently, under the influence of Cosmo and Wanda's magic, Mr. and Mrs. Turner reveal how much they have lied to Timmy and admit that dismissing truths only makes their lives easier. After Timmy's leave, however, they feel guilty and decide to count the total number of lies made to their son so far.
Timmy arrives at school with his lunch including his magic muffin. From his van, Mr. Crocker shoots a fork which aims at Timmy's lunch bag, causing the muffin to fall out of sight. During lunchtime at the cafeteria, a food fight with muffins ensues. A caged monkey named Bippy eventually ends up with the Fairy-versary muffin and wishes for a primal world where monkeys are the dominant species. In the new monkey world, Timmy attempts to retrieve the magic muffin in order to undo Bippy's wish, only to end up sent to Chimpsdale, the "forbidden city", for human dissection by the apes. Remembering Timmy freed him from his cage during the school's food fight, Bippy wishes the world back to normal, with humans being the dominant species again.
Mr. Crocker eventually finds the magic muffin, which he uses to obtain a butterfly net — one of the few items a fairy's magic has no effect on — and capture Wanda in order to become an all-powerful magical leader using her magic. The entire world is transformed into a bleak wasteland ruled by Mr. Crocker, and all citizens become his slaves. Back in Timmy's bedroom, Timmy manages to be immune to Mr. Crocker's magical effects with the magical presents he received from his Fairy-versary party. With his identity concealed, he uses his magic to fight Mr. Crocker's magic. Cosmo briefly assists Timmy during the fight, only to end up joining Wanda in Mr. Crocker's scepter.
Mr. Crocker battles Timmy throughout various areas, and neither of the two are defeated. After Timmy's identity is inadvertently revealed, however, Mr. Crocker goes to Timmy's residence and holds Timmy's parents hostage.
Upon arriving back at his home, Timmy surrenders and asks Mr. Crocker for one last moment with his parents. Mr. and Mrs. Turner apologize for lying and reassure their love to Timmy, who at this point confesses to them he has fairy godparents, thereby losing Cosmo and Wanda which frees them from Mr. Crocker's scepter. Mr. and Mrs. Turner beat up Mr. Crocker, now powerless without the fairies. Timmy acquires the Fairy-versary muffin and wishes Cosmo and Wanda to be his godparents again. The fairies poof the world back to normal and make everyone forget they existed. Timmy's parents now stop lying to their son, and Mr. Crocker is locked away in an asylum.
Cosmo and Wanda explain that a Fairy-versary is a day that a godchild celebrates having kept his/her fairies a secret for one year. Timmy asks if that is a big deal. The Easter Bunny says it is because by this time most godchildren would have already had their fairy godparents taken away. Timmy asks why and Jorgen shows an example explanation. According to Jorgen, usually by one year a godchild has done something to reveal the existence of their fairies. The party is kept uninterrupted by a "Forget-me-Knob" installed in the door, which when touched, immediately causes the person opening the door to forget what they were doing. Among the various magical gifts Timmy receives from the magical friends he has made over the past year, that includes a jetpack, floss, glasses that changes faces, arrow and bow, a mirror, grenade-like Easter eggs and Santa's magic bag, he is given a magical (but bad-tasting) muffin, which can grant a rule-free wish. Timmy asks how he got fairy godparents and Wanda tells him the story. A flashback is shown with 8-year-old Timmy and how a 14 year old Vicky got into his life and started torturing him. Timmy realizes he is miserable because his parents lied to him and tricked him into having Vicky hired.
Timmy inadvertently wishes for his parents to always tell the truth, and when he questions his parents why they lie to him, they give him the harsh truth. The school bus arrives and they shoo him off to school, but Mr. and Mrs. Turner are noticeably bothered when they start to count the amount of times they lied to Timmy and it begins to number in the thousands. Meanwhile, at Dimmsdale Elementary School, Timmy takes the magic muffin to school with him. Mr. Crocker, who had been stalking Timmy in his "Inconspicuous" Van, detects Fairy Magic in the shape of a muffin and fires a fork at Timmy's lunch bag. The fork pierces the bag and causes the muffin to fall away from Timmy, and then the fork gets embedded in Principal Waxelplax's rear end. Mr. Crocker reels in Waxelplax like a fish only to realize his mistake, and try to cover himself by saying he was in love with Waxelplax, which she finds sudden and unwanted.
Timmy notices the muffin is gone and he tries everything to get it back. Inside Mr. Crocker's class, Crocker is so distracted by the muffin he cannot even teach, and tells the children to stare at the blackboard until lunchtime. As the bell rings, Timmy realizes he has been chained to his desk, and Crocker tells Timmy his plans to get the muffin before Timmy does and use its magic to rule the world. Timmy wishes himself free of the chains and reaches the lunchroom, only to discover at lunchtime that today is "Muffin Monday" and loses it among mountains of muffins. As Crocker has a magic detecting device with him, Timmy devises a way to slow him down by starting a muffin food fight. Elsewhere in the cafeteria, a monkey named Bippy, belonging to A.J., is caged and watching the food fight. Timmy feels sorry for him and lets him out. However, as Timmy, as well as Mr. Crocker, continue to search for the muffin, Bippy finds the muffin before either one of them, and takes a bite. The monkey makes a wish, and since anyone can use the magic muffin, his wish is granted.
Suddenly, the whole world is transformed, leaving monkeys the rulers of Earth. To make matters worse, Timmy loses his Godparents when Jorgen von Strangle announces to all fairies that Da Rules say they have to be Godparents of the "dominant species" on Earth: monkeys. Bippy ends up getting Cosmo and Wanda as godparents, and is for a time apparently the subject of his own Fairly OddParents opening song spoof (with heavy emphasis on bananas).
Timmy, who still remembers Cosmo and Wanda, follows Bippy to try to get him to unwish everything. Timmy returns to Mr. Crocker's class, who is now ranting about Apes using fairies to take over the world. Mr. Crocker is taken by the apes to a place off-limits to Humans. With Crocker gone, Timmy enters the Crocker Cave and steals a magic detector. He uses the magic detector to track down Bippy, whom he finds with the Fairy-versary muffin along with Cosmo and Wanda. Timmy almost succeeds in retrieving the muffin, but is captured by the Apes and brought to the human testing center along with Mr. Crocker and Francis. Crocker is to be dissected first, but he fearfully begs for Timmy to be taken instead. Timmy is taken to a surgical room where his skull is about to be drilled into when Bippy showed up to rescue him. Bippy manages to fight off the apes at first, but is eventually overwhelmed.
Luckily, due to Cosmo's 'paraphrasing' of Bippy's wish, which Cosmo claims could just as easily have been for another banana, everything is unwished moments before Timmy was about to be harmed. Unfortunately, Bippy also lost the muffin during the scuffle, and immediately after the world is returned to normal, Crocker finds the muffin, takes a bite, and wishes he could catch a fairy. He obtains a butterfly net (one of the few items a fairy's magic has no effect on) and managed to kidnap Wanda with it before running off. Distraught, Cosmo attempts to chase after Crocker but Timmy holds him back in fear that he would get captured. Cosmo proceeds to break down in tears and chickens out of the battle. Timmy and Bippy must fight Mr. Crocker themselves, but the Food Cart Guy passes by with more muffins and distracts Bippy, leaving Timmy on his own with a devastated Cosmo. Timmy realizes that the first thing Mr. Crocker will do with his newfound power is rub it in the face of his students, so he rushes back to his school. With his new-found power, Mr. Crocker appears in a power armor suit which has Wanda trapped in a scepter and the Fairy-versary muffin within the chest cavity. He terrorizes his students by turning them into ice statues (he wanted to turn them into ash), turning Sanjay and Chester's heads into toilets when they asked to go the bathroom, and then chases Timmy off as he transforms the world and makes himself the all-powerful magical leader.
Timmy and Cosmo arrive at home before Crocker's magic covers the world. They hide themselves in Santa's magic bag and get unaffected by the magic. Timmy then arms himself with his gifts and goes battle Crocker.
Jorgen Von Strangle scrambles the fairies and destroys the bridge to Fairy World after discovering a fairy has been captured. Crocker is busy making everyone in Dimmsdale, now called Slavesdale, bow down to him, including Chet "Ubowdown", Principal Waxelplax, A.J., Vicky, and Tootie. Timmy shows up and decides to fight magic with magic, and with the help Cosmo, Timmy engages Crocker in a magic sword fight like duel with his magic mirror and Crocker's scepter. The mirror gets broken and Crocker was about to transform Timmy into a shrimp when Cosmo appears "massive pecs" to help defeat Mr. Crocker and free Wanda. Cosmo has the upper hand at first, and nearly defeats Crocker on his own, but he lets his guard down when he is reunited with Wanda and is captured as well. Now on his own, Timmy is transported to space by Crocker, and he uses his magic glasses to get a helmet and breath. Crocker appears and starts attacking, but Timmy throws a rock to him and breaks his glass mask and get transport to ancient Egypt, where Crocker reanimates a Great Sphinx. Timmy uses his Easter eggs on it but it didn't work, so he traps the Sphinx's teeth in floss to control it. Timmy gets the advantage but Mr. Crocker destroys the Sphinx's nose, plus getting it back to normal. Crocker now transports everyone to a subatomic level. Timmy hides from Crocker but gets capture and remembers what happens when an atom is divided, so he uses his arrow and bow to divide one, causing a giant atomic explosion that bakes everything. Crocker survives via magic and when he thought that he won, Timmy reveals himself alive because he involved in Santa's bag again but his identity is discovered when a cooked bird falls on him and breaks his glasses. Crocker then transports to Timmy's house to intimidate Timmy with his parents. Timmy attaches to Crocker with floss but Crocker throws him to the other end of the portal. Timmy crashes in a part of Slavesdale. The crash gets the Santa's bag unusable and useless but Timmy flies home via jetpack.
Timmy races Crocker back to his ransacked home but is too late, Mr. Crocker has Timmy's parents captured in a magic bubble. Timmy then realizes that there was only one way to fix everything: he yells out loud, with his parents as witnesses, that Cosmo and Wanda are his godparents. As this is the biggest breach of Da Rules, they disappear, and Crocker's power is gone. Now powerless, Mrs. Turner beats up Crocker, knocking out his teeth in the process, as punishment for attacking her family, which causes the muffin to fly out of his hand. Timmy eats it whole and wishes for Cosmo and Wanda to be his godparents again while Mrs. Turner mercilessly knocks out Crocker's teeth and pounds him to a pulp. Timmy's wish is granted, and as they reappear, Timmy wishes - successfully - that everything be returned to normal and that no one remembered he had fairies. Timmy and his godparents secretly watch Mr. Crocker try to claim to people that fairies exist and that they should bow to him. Waxelplax states today Crocker is going to bow down for his medicine. Two guys in hospital gear then take Crocker and hit him with a needle, knocking him out with one guy saying "Nighty-night crazy guy!"
It all seems to be over until Jorgen Von Strangle shows up in Timmy's room and says that, even though everything is fixed, he still broke Da Rules, told his parents that he had fairy godparents, and has overall caused too much damage. Therefore, he is still going to take Cosmo and Wanda away. Asked for any last words, Timmy yells, "Think fast!" and throws the Forget-Me-Knob at Jorgen's head, who forgets what he was doing, and turns to Cosmo and Wanda. They say that Jorgen was going to reassign them to Timmy - which Jorgen does, and then leaves (to scramble the fairies). Timmy reminds them that he "just got fairy godparents", so Cosmo and Wanda set up a huge stage with lights, saying, "I'm Cosmo," "And I'm Wanda," "And we're your fairy godparents!", referencing The first episode of the show Timmy hugs them and says "And I wouldn't wish it any other way!". Bippy passes nearby with a wheel wagon full of muffins and happily eats one. Finally, Crocker is seen locked away in an insane asylum, tranquilized to sleep by a needle-shaped Cosmo, who says, "Nighty-night, crazy guy!".