Ash, Misty, and Tracey are riding Lapras once again, and Ash is admiring his badges. Tracey tells him that he only needs two more badges and he'll be able to battle in the Orange League, and he expresses his eagerness to get them. The see Moral island appear over the horizon and decide to turn in for the day.
Night falls, and Ash and his friends find a Pokémon Center to stay the night in. Ash calls Professor Oak, who tells him that a 300 year old trophy from the Orange League has been found in a sunken ship just offshore. It's been put on display at the local Museum of Arts, and they decide to check it out the next morning.
Later that night, at the museum, three dark figures climb down from a window. It's Team Rocket, and they've come to steal the trophy to give their boss. Within moments, they find it. Meowth puts on some special glasses and tells Jessie and James that there are several security beams guarding the trophy. The only way to get at it is from above, so they use James. They lower him down, and he grabs it. They hurry out, laughing. Meowth suggests that they celebrate and James trips, leaving an imprint of the trophy in the soft soil.
The next day, Ash and his friends approach the museum and see a large crowd of people standing at the entrance. They ask Officer Jenny what the matter is, and she tells them that someone has stolen the trophy. The only clues are some footprints and a mysterious imprint in the ground. Disappointed, they make their way to the shore to set off again. Ash stumbles over something, which turns out to be James's leg. They peer over a bush and see Team Rocket waking up from the long night of celebrating they had had. They incriminate themselves in front of Ash and his friends, and they realize what the Rockets did.
Team Rocket says the first line of their motto, but hurry off with the trophy. As they run, they finish the motto. Meowth hands James the trophy, and they hop into a boat shaped like a Seadra. Much to their chagrin, it's a paddle-boat. They start pedaling, and move away from the island. Ash sends out Lapras, and they follow. Suddenly, a thick fog rolls in. Jessie and James stop pedaling and a large galleon appears. They climb aboard to check things out. It looks abandoned, and James comments that the only type of ship people find like this are haunted. The words sink in, and the three cling to each other in fright. A translucent figure appears behind them and they run towards the railing, only to fall through a hole in the rotted floor. Ash and his friends soon come upon the old ship as well. They see Team Rocket's boat, and decide that they have to check things out. Misty is less than pleased.
As they search the deck, Misty gets the feeling that they are being watched. One of the masts falls, narrowly missing Misty. Togepi falls out of her hands and into the hole in the deck. Horrified, they look in to try to see it, but it's too dark. They jump down and search. Togepi, meanwhile, goes into a room whose door opens mysteriously.
Team Rocket is having trouble finding their way out. Jessie tries to calculate which direction they should go, and feels a tap on her shoulder. She hits James on the head with a mallet, but he says that it wasn't him. They look behind themselves and see the white, sheeted figure. They run in the opposite direction, only to see another figure show up in front of them. It grabs the package James holds and tries to get it away from him. The other figure licks Jessie and Meowth, who were trying to keep the package away, and they fall to the ground. The figure succeeds in getting the trophy, and they both fly to the room in which Togepi is in.
Meanwhile, Tracey sends out Marill to help. He tells it to listen for Togepi, and it soon runs off, Ash and his friends following. It leads them to a room, and they see a huge shadow on the wall. They look down, and it turns out to be Togepi. The two sheeted figures appear again and swirl around it. Misty sends out Staryu, who unmasks them as Gastly and Haunter. They lunge at Togepi again, and Ash sends out Bulbasaur to protect it. Fortunately, they just wanted to play. Misty wonders aloud why the two Ghost Pokémon are on the ship, and they notice the trophy sitting on a table.
Before they can get at it, Gastly and Haunter block their way. Team Rocket shows up all of a sudden, and James sends out Victreebel who for once doesn't eat James (it chases Meowth). Jessie sends out Arbok, but neither Pokémon can make contact. Gastly uses Night Shade, knocking out Victreebel, and Haunter's Confuse Ray makes Arbok attack the Rockets.
Haunter grabs Meowth as it tries to run away, and the two use him to talk to Ash and his friends. They say that they have guarded the trophy for centuries, as the captain of the ship and the owner of the trophy was their master. The ship carried supplies from one island to another, and he was loved by all. One night, the ship went down during a storm. It rested at the bottom of the sea for a long time, until it was discovered a few days before. The humans took the trophy, and invariably released Gastly and Haunter. They raised the ship and went to find it.
Ash comments that the captain must have been very good, and they are put into a different world to show them just how good he was. It's an old stadium, and the captain defeats a Beedrill with Gastly. Then the image disappears.
Ash and his friends tell Gastly and Haunter that they understand how the trophy should stay on the ship. They are told to leave, and Haunter lets go of Meowth. Team Rocket lunges at the trophy again, but get shocked by Pikachu, and sent out of the episode by a move from Haunter. After Ash and his friends de-board, the boat floats into the sky. The three wave farewell as it flies over the horizon.