King Julien challenges the penguins to a game of Capture the Flag, but every time they play, the lemurs win, resulting in the penguins losing their possessions in every match.
Skipper and Private are competing against Kowalski and Rico in a game of capture-the-flag for training purposes. King Julien sees them playing and wants to join in on the fun. Skipper won't let him join because he believes capture the flag is a game for the elite, aka not Julien.
Upset by this, Julien mocks Skipper into letting the lemurs compete against the Penguins. King Julien wants to make it interesting so he bets Mort against the Penguins' TV. The Penguins lose horribly and Skipper demands a rematch. The Penguins end up losing everything because Skipper demands a rematch every time they lose.
Eventually, Skipper realizes that the lemurs travel through the trees to get to the flag faster. He comes up with the idea of flying using jet packs to even the playing field. Skipper challenges the lemurs to one last game, winner takes all.
It turns out that the Penguins' jet packs are soda bottles strapped to their backs and their wings are Styrofoam cut-outs. The Penguins shake the bottles in order to build up pressure which causes them to launch into the air and fly around. The Penguins dive-bomb King Julien, Maurice, and Mort while they casually stroll towards the flag. Maurice falls off a branch because Rico startles him, and King Julien jumps off as well when dive-bombed by Skipper. King Julien makes a final attempt to get to the flag but Skipper flies over him, knocking him over. Julien watches in horror as Skipper plucks the flag off of the pole, winning everything.
Maurice and Julien (who is seen crown-less) stand on what used to be Julien's kingdom. It has now been reduced to nothing but rocks. King Julien and Maurice realize that the penguins really meant "all" when they said "all or nothing". Mort is then snatched by a penguin.
The penguins are celebrating their victory in Julien's bounce house, the Royal Bouncy. Skipper relaxes on Julien's throne, wearing his crown. He hands over Mort a fish to eat, despite the fact that he is NOT a penguin. Mort sighs sadly.