Jealous of Joanie's friendship with a new girl in school, Mikki, Jenny spreads a false rumor that Mikki is pregnant. As the rumor circulates, Fonzie is added to it as being the child's father.

In an attempt to get Ashley's young daughter, Heather, to warm up to him, Fonzie takes her to the circus. Meanwhile, K. C., Howard's niece, moves in with Howard and Marion while her parents look for a new boarding school. Marion asks Howard to consider letting her stay permanently.

Joanie and Chachi have the opportunity to appear on a television music show but learn that their format is folk. Meanwhile, Fonzie is upset that folk music seems to be replacing rock and roll.

Fonzie pledges his love to Ashley but risks losing her when he allows an old girlfriend to spend the night at his apartment. Meanwhile, Howard teaches K. C. to drive.

Marion encourages K. C. to date, so she accepts an invitation to Arnold's Gala Costume Ball from Melvin Belvin.

Facing competition from a hardware store at a new mall, Howard says he'll have to close Cunningham Hardware.

When Heather asks Santa to patch up the rift between her mother and grandparents, Fonzie decides to make her wish come true. Meanwhile, K. C.'s parents visit for Christmas, and a rivalry between Howard and his brother reignites.

Roger tries to convince Flip to stop drinking and hanging out with guys that do. Flip doesn't take his advice, and he and his friends accidentally hit Heather with their car.

Meanwhile, Fonzie auditions barbers to replace his who recently died. Also, Jenny, K. C., Bobby, and Melvin are in charge of decorations for the Winter Carnival.

Fonzie hires a convict, via a work-release program, to be a mechanic at his garage. After the convict, Jim, sees K. C. perform a song at Arnold's, she invites him to dinner. Howard stops K. C. from seeing Jim after Fonzie informs him and Marion of Jim's felonious past.

A record producer hears a demonstration tape of Joanie and Chachi and is eager to sign them. However, Chachi has an argument with Mario, a member of the band, and says they're breaking up.

It's Heather's birthday, but Fonzie (along with Potsie and Roger) has to report for the Army reserves. He promises Heather that he will be at her party, but he didn't count on Officer Kirk being the commanding officer.

Fonzie and Roger miss their flight to Minneapolis for a teacher's convention, so they agree to go with Potsie's uncle, Omar, who has a small plane he uses for crop dusting and spreading ashes. Omar jumps out when there is trouble with the engine leaving Fonzie and Roger by themselves with no parachutes.

Fonzie is the best man at the wedding of an old pal, but the bride-to-be stops the ceremony after spotting Fonzie. Meanwhile, K. C. awaits word about a part in the school musical.

Fonzie babysits Heather when Ashley leaves for a tax seminar, but his attention is drawn away by a televised heavyweight title fight leaving Heather resentful toward him. Meanwhile, Joanie and Chachi return to Milwaukee after Joanie says she's sick.

After deciding to quit the band, Joanie moves back in with Howard and Marion to enroll in a teaching program at the University of Wisconsin. Chachi tries to convince her to stay with him in Chicago after he isn't willing to go with her back to Milwaukee.

Jenny dumps a nice guy to be with a former Olympic swimmer, but K. C. learns that the swimmer doesn't feel the same way about Jenny as she feels about him. Meanwhile, Fonzie wants to have a swimming pool put in the Cunninghams' backyard.