In the beginning, Starfy was moving things around Pufftop Palace, until he tripped and dropped some things he was moving. One of them fell into the ocean, which was the Magic Jar, an object that seals the evil being known as Ogura.

Surrounded by the vast sea there is a kingdom high above the clouds called Pufftop. Living there is Starfy, the prince of Pufftop. Starfy is often careless and clumsy in nature. Times were normally peaceful in Pufftop, until Starfy was carrying around valuable treasure and he accidentally dropped a jar into the ocean. Just then, the being inside the jar used his magical powers to create a terrible storm. Tornadoes then struck the Pufftop Palace. Starfy struggled to hang on, and eventually dropped into the ocean showing his Done For pose. Starfy fell straight into Lobber's Cave, located on a small island.

A wise lobster, Old Man Lobber found Starfy in his cave and asked Starfy if he could hear him. After finding out that Starfy is OK, Old Man Lobber advises that Starfy should rest a while in his cave from the terrible storm. Old Man Lobber wonders what to do with Starfy, as he is too weak to return to Pufftop. Old Man Lobber mentions a friend of his, Herman and Starfy proceeds to find Herman.

Starfy finds Herman wearing an ordinary gray shell. He has lost his missing home; a conch shell called the Pretty Shell and Herman asks him to find it. After finding a Kettle, Herman, believing it may have been washed further, gives Starfy a key leading to another part of the level, where Starfy finds a tusk shell - the Dentalium Shell. After finding the tusk shell, Herman - who finds the shell too small - thinks that it is behind the rocks. He then teaches Starfy how to use the Star Spin attack. Later, Starfy finds the colorful conch shell and returns it to Herman. Herman is very grateful for Starfy and leads Starfy to the next stage, Coral Reef.