As Haroun, Butt, and Iff journey towards Gup City, Haroun considers that many ideas he formerly considered mere fiction are turning out to be true, and Butt replies that Kahani would be a very strange story moon if fictional elements weren't everywhere.
Despite the absurdity of Kahani, it does possess its own logic in that to be a "story moon," it must contain the absurd elements of the stories it holds.
Haroun asks Iff to tell him about Khattam-Shud, and Iff replies with Rashid's exact words, that Khattam-Shud is the archenemy of stories and language, and the prince of silence. Breaking his serious tone, he then says that this is all gossip at this point because no Guppees have been to the Land of Chup in generations. Chup lies across the Twilight Strip into the Perpetual Night. Haroun asks for clarification on geography, and Butt explains that the Eggheads at P2C2E house brought Kahani's rotation under control so that the Land of Gup is in perpetual daylight, while it remains dark in Chup. The Twilight Strip lies between, with a wall, named Chattergy's Wall, separating the two lands. Butt ends the conversation in favor of paying attention to traffic in the ocean.
Despite striking fear in Haroun's heart, Khattam-Shud the individual is little more than a story to the residents of Gup. Notice also that in this explanation the controlled rotation of the moon—a form of censorship and an assertion of power—is normalized and accepted. Haroun begins to briefly consider the wisdom of the situation, but this situation will later allow for greater exploration of how balance plays out through the extreme and absurd measures both Chup and Gup must take to make life livable on their respective halves of the moon.
Haroun has many questions about life on Kahani, but finds his attention diverted by the numerous mechanical flying birds all rushing the same direction, with Water Genies on their backs. Iff says that something serious has happened, as everyone is being called back to base, making a jab at Haroun about stealing his Disconnecting Tool. Haroun's attention is again diverted as some sort of vegetation races next to Butt in the water, and he asks what it is. Butt replies that it's a Floating Gardener. Haroun tries to say that it's a Floating Garden, but Butt harrumphs and the Floating Gardener rises from the water and shapes itself into a man, with a lilac flower as the head.
Again, elements from Haroun's life in Alfibay are appearing in his dream (remember Rashid pointing out the floating garden on the Dull Lake). We're also again confronted with the fact that Butt the machine has a definite personality, as he appears offended or at the very least exasperated by Haroun's attempt to rationalize what he's seeing.
Iff and the Gardener exchange greetings, and Haroun notes that the Gardener isn't very talkative. Iff replies that this Gardener is talkative, for a gardener. Haroun introduces himself, and the Gardener introduces himself as Mali. Mali, with Butt's help, explains to Haroun that the Ocean is like a head of hair, and Gardeners are tasked with untangling, conditioning, and cleaning the Story Streams like one would hair. When Iff asks, Mali says that the pollution in the Ocean is lethal, spreading rapidly, and will take years to clean up, although the source is still unknown.
The job of the Floating Gardener further supports Rushdie's insistence that stories are living, breathing entities, in need of care and attention to preserve them. Haroun's expectations are being turned upside down as he learns that Mali is considered talkative. Haroun's expectations will be constantly challenged (often in humorous ways), which will lead him to see the value of balance.
Hearing more voices, Haroun looks down into the Ocean and sees two triangular Angel Fish, big as sharks with dozens of mouths all over, sucking in Story Streams and spitting them out again. Butt tells Haroun that they're Plentimaw Fishes, and they partner for life. To express this union, they speak in rhyme with their partners. Haroun, noticing that these fish seem unwell, inquires about their health, and the Plentimaw Fish reply that the Ocean is starting to hurt, and that their names are Bagha and Goopy. Iff tells Haroun that these fish may seem talkative, but are actually much quieter than usual due to the pollution they're ingesting.
Similarly to Mali, the fact that Bagha and Goopy seem talkative to Haroun but quiet to Iff further upsets Haroun's expectations. Meeting these very different characters gives him a wide cross section to consider as he builds an understanding of Gup and its inhabitants (and the very idea of what being “talkative” means). The job of the Plentimaw Fish harkens back to Mr. Buttoo's comment that there are "plenty more fish in the sea," in a clever play of language. Note also how rhyme is again used to develop the plot, and that the emphasis on the Fishes’ close and lifelong bond (and one based in language, at that) might reflect Haroun’s desire for his parents to once again experience such a connection.
Iff tells Haroun that Plentimaw Fish swallow stories, and in their bellies, the stories mix and then new stories are spat back out. Goopy and Bagha offer one more couplet, saying that things are worst in the Old Zone. Iff is aghast and explains to Haroun that the Old Zone is in the southernmost region of Kahani, and the ancient stories flow there but are no longer in high demand. Legend says that the source of stories, or the Wellspring, is located there, and Iff wails that they've ignored the Source for too long. Butt interrupts, telling its passengers that Gup City is ahead.
The fact that the fabled Source of Stories exists in the same place as the ancient stories again reinforces the value of all stories, even old and seemingly tired ones. Taken with the job of the Plentimaw Fishes, Rushdie creates a system in which the ancient stories necessarily play into the creation of new ones. However, as we're presented with the conflict that the Guppees have ignored their oldest stories, it also brings this relationship into question.
Gup City is built on an archipelago of 1001 small islands, crossed with waterways. The waterways are filled with worried looking Guppees heading towards the Lagoon, which separates the islands from the mainland. On the mainland stand the three most important buildings of Gup: The Palace of King Chattergy, the Parliament of Gup, and the P2C2E House. Butt drops Iff and Haroun off at the edge of the Lagoon in the Pleasure Garden. Haroun notices a number of very thin Guppees wearing rectangular garments covered in writing, whom Iff explains are the Pages of Gup, or the army, which is organized into Chapters and Volumes and led by a Title. He points out General Kitab, the leader of the "library."
The 1001 islands again recalls the motif of 1001 Arabian Nights, reminding the reader that this story cannot stand alone—it needs to be considered as part of a whole, or as part of a library, to be fully understood. The form that the Pages of Gup take reinforces the importance of stories (as well as punning on “paiges”), as the entirety of the army makes up, essentially, a full library. Kitab means "book," which creates another layer of meaning to reinforce the relationship.
Iff gestures to the balcony of the palace, pointing out General Kitab, a court Speaker, King Chattergy (looking tragic), a worked up young man that Iff says is Prince Bolo, and a bald man with an insignificant moustache. Haroun whispers to Iff that the bald man reminds him of Mr. Buttoo, and then asks who the man is. Other bald men turn to look at Haroun with disdain, and they tell him that they are the Eggheads, and the man on the balcony is the Walrus.
Haroun has preconceived ideas about what a man as powerful as the Walrus should look like, and those ideas do not come to fruition in this situation. This will happen several times throughout the novel as it explores both its own texture and storytelling conventions, such as what a powerful person (or a villain) should look like. Note also that the Walrus—the rather disappointing bureaucrat—is here conflated with Mr. Buttoo.
King Chattergy raises his hand to silence the crowd, attempts to speak, and finds he cannot. Prince Bolo instead bursts into speech, saying that the servants of the Cultmaster have seized Princess Batcheat. General Kitab adds that she's most likely being kept prisoner in the Ice Castle of Khattam-Shud in Chup City. The Speaker then says that the Guppees have sent messages to Khattam-Shud concerning both the pollution of the Ocean and Batcheat's abduction, and the demands of the messages have not been met, therefore meaning that Chup and Gup are at war.
King Chattergy, despite his name, is unable to form language in his sadness. Bolo comes from the Hindustani imperative "to speak," which he does with frequency but without much consequence, nuance, or thought. Here we're also presented with the two main conflicts in Haroun's dream-story—the abduction of Batcheat and the poisoning of the Ocean.
The Walrus tells the Guppees that they need to act quickly, as the poison is spreading swiftly through the Ocean, and the crowd shouts "Save the Ocean!" Then Prince Bolo shouts "Save Batcheat!", and the crowd suffers a moment of confusion. Finally they shout "For Batcheat and the Ocean!", which seems to satisfy Bolo.
The conflict of the relative importance of the two issues will provide humor throughout the novel, and we see that the Guppee crowd is willing to go along with both issues. It also serves to provide more information on Bolo's character, as it's obvious where his loyalties lie.
Iff turns to Haroun and tells him that with the war, the Walrus won't have time for Haroun's request, suggesting he hand over the Disconnecting Tool and allow Iff to take him home. Haroun refuses, and Iff offers him chocolate. Suddenly, a small commotion breaks out on the palace balcony, and General Kitab emerges from inside to announce that patrols from the Twilight Strip had arrested a suspicious stranger. Bolo shouts that he will question the stranger himself, and General Kitab looks somewhat embarrassed by the idea. A group of Pages lead a man in a nightshirt onto the balcony, and Haroun drops his chocolate when he sees that the man is his father, Rashid Khalifa.
Iff's easy handling of Haroun refusing to give back the Disconnector further serves to show how easygoing the Guppees can be. Despite being annoyed at Haroun for stealing, Iff is offering him a treat and doesn't seem particularly concerned, which Haroun will consider later. We again see the kind of person Bolo is (perhaps a parody of the heartbroken Rashid). Bolo's speech, full of bluster and shouting, is embarrassing to his fellow Guppee officials, and illustrates that speech isn't always useful or beautiful. In this crucial moment, Rashid himself joins in Haroun’s dream, seemingly still with his own agency and character.