SpongeBob is waxing Gary when the local mailfish shows up and hands SpongeBob a videotape delivery. SpongeBob plays the tape on his TV, which states that he has been crowned "King of Karate" and tells him to attend to "Karate Island" to be crowned.
SpongeBob is about to leave when he encounters Sandy, to whom he happily explains that he is the King of Karate. Sandy is suspicious of this, so she accompanies SpongeBob on the boat ride. The boat stops at Karate Island, where the guru, Master Udon, greets SpongeBob but ignores Sandy. SpongeBob, to prove his Karate skills, asks to fight Master Udon's best guards. Three guards arrive, and when they fight SpongeBob, they pretend to get hurt and soon pretend to be defeated.
Sandy notices this, adding to her suspicion. SpongeBob is officially crowned "King of Karate" and sits on his throne and requests Sandy to sit beside him in a lounge chair. Sandy leaves when SpongeBob becomes arrogantly proud and accuses her of being jealous of him. After she leaves, SpongeBob is suddenly locked into his throne. Just as the water is up to Sandy's head (she was walking into the water about to leave), she hears SpongeBob's cries for help, and reluctantly goes back to save him.
Sandy fights through Master Udon's Tower, fighting an opponent on each floor with an unusual "power" (there are three floors that Sandy has to get through and for all of them, she had to avoid being tickled, kissed and smelling the filth of Udon's minions) until she crashes through the top floor's entry way; the trapdoor where SpongeBob is being held hostage by Master Udon. Udon reveals that he is a real estate agent, and won't let SpongeBob go until he agrees to buy a time-share condo on the island, while also increasing his equity. He then tells SpongeBob he is not the king of karate, but could be king of condos. SpongeBob shouts in horror and Sandy attempts to fight Udon, but he drops a sturdy bamboo cage on her, which she quickly breaks out of with meditation, strange hand movements, and weird muttering. Master Udon rips off his robes while Sandy rips off her jumpsuit to expose her bikini and after a brief muscle growth in their swimsuits, the two begin fighting, (Udon's extra muscles were in his eyebrows, and Sandy's were in her tail) and Sandy defeats Udon by kicking him out of the room into the water below and she frees SpongeBob. As they leave the island, Spongebob apologizes to Sandy for acting like a jerk to her and thanks her for saving him from buying a condo, and which she forgives him and tells him that's what friends are for. Then Spongebob asked if he's not the king of karate anymore, Sandy tells he is in her book. Then she explains to him about real estate as the boat leaves shore.
The episode ends with Squidward arriving in "Clarinet Island" to be crowned "King of Clarinets," and him being looked down upon by Master Udon.
The original airing had a small amount of blood on Master Udon's face after being beaten up by Sandy. This was removed due to being deemed too violent for a TV-Y7 show. The dedication card at the end of the episode was removed after the Best Day Ever Marathon.
The episode originally ended with a dedication to Noriyuki Pat Morita (1932–2005), also known as Mr. Miyagi from The Karate Kid series, who voiced Master Udon in this episode and died on November 24, 2005. The online version, the Polish airings, the Canadian airings, the Turkish airings, the Spanish airings, the German airings, the Philippine airings, on the British Nicktoons and DVD versions still have the dedication.
"Karate Island" was ranked #1 during the Best Day Ever event on November 9–10, 2006.
This episode is noted to be one of the most violent in the series, due to the scene when Sandy breaks Master Udon's leg, during the karate fight, which is illegal in any form of martial arts. 
As of August 11, 2016, The Internet Movie Database (IMDB) gives this episode a rating of 7.3/10 based on 214 ratings by users. TV.com users give this episode a 6.7/10 based on 186 votes.
The painting of a boat inside Gary's shell is a replica of the painting over The Simpson's family couch.
Udon is named after a Japanese/Korean noodle soup. When Sandy defeats Udon, she says: "You're in the soup now, Udon!"
In Germany, this episode is called "Der König des Karate" translating to "The King of Karate."
In the Greek version of this episode Squidward (at the end) says "Είμαι εδώ, είμαι ο βασιλιάς του Καράτε και είμαι εδώ" which means "I am here, i m the king of Karate and i m here" but he should say Clarinet instead of Karate.
The Tickler's mouth full of jelly filled donuts that Sandy used to attack is similar to Patrick's mouth full of snowballs that SpongeBob used in "Snowball Effect."
In the scene where Sandy fights the enemies on each floor, the dialogue is dubbed, similar to old style Kung-Fu films.
Sandy's helmet protects Sandy from Filthy Phil's body odor, but in other episodes, Sandy's helmet doesn't protect Sandy from any smell at all such as Squidward's belch stench from "Squidtastic Voyage."
This is the first episode to have sound effects on title cards.
The first few airings of the episode, it said: Pat Morita (1932–2005) with a picture of him at the end. Later, Nickelodeon took this off.
But this is kept on the British Nicktoons due to this keeps the first versions of the episodes.
This episode is the first episode to have an animated title card with sound effects added as well as the title card music. The second episode to do so is "The Donut of Shame."
There may be some references to Naruto. As when breaking out of the Cage, Sandy does hand seals and she breaks out.
When Lip Service says: "Dance, Squirrel, dance," it is a possible parody of The Rocky and Bullwinkle cartoons where Natasha Fatale says: "squirrel" in the same accent. It might also be a reference to an old Looney Tunes episode where Yosemite Sam says to Bugs Bunny "Dance, Rabbit, dance."
The scene in which Master Udon falls through the wall and lands in the water is a redo of the last scene of Game of Death, where through an aerial view, the villain is seen falling down to the streets, after being kicked off a balcony by Bruce Lee.
This episode contains many references to films Game of Death and Kill Bill: Sandy's yellow jumpsuit is a reference to the jumpsuit that both Bruce Lee and Uma Thurman wore in their respective films. Also, the concept of fighting an opponent on each floor is also present in both of these films.
This episode is also similar to a series of episodes in the Red Ribbon Army saga of Dragonball, where Goku tackles six floors of challenges. This episode is also attributed as a reference to Game of Death.
Sandy's and Udon's muscle growth is loosely based on Toguro's 100% muscle growth in the anime Yu Yu Hakusho.
When Sandy kicks Master Udon in the face, she is shown with five toes, but she usually only has three toes.
When Master Udon throws Sandy in the wall, her helmet doesn't break although it should.
It is unknown how SpongeBob got out of the chair that he was cuffed to.
It was also unknown how the chair that SpongeBob was cuffed to got to the top floor of the Four Floors of Fear. Unless Master Udon had to carry it.
Also, Sandy's costume changed after the scene SpongeBob screams "I can't handle this myself."
When The Tickler says "Oh no! Jelly-filled donuts? How did you know they were my weakness?" his voice is out of sync with the animation. However, this may have been done intentionally as a parody of English dubs of Hong Kong movies, which are notorious for their dubbing.
When Sandy throws jelly filled donuts at The Tickler, the first shot of the plate shows that there are barely any left, but the second shot shows the plate full of donuts again.
Sandy said she taught SpongeBob all about fighting, but in "Tea at the Treedome," he knew karate before they met. This can be reconciled if it's assumed that she was exaggerating in this episode.