Lonely Lazlo takes place in a small town that is built into the hillsides. The town has a large harbor that is the only way in or out. The townspeople are not very friendly to outsiders. There are two reasons for this situation. First, the townspeople enjoy their privacy. Second, they fear people will find out about the ship. The ship is a large transport vessel that sank during a violent storm. However, the ship is believed to have a creature living inside. Two boys move to town because their mom took over the job of Fire Chief. They have a very difficult time making friends with the local children. The boys' feel dejected and set out to discover the mystery behind the ship.