In 1935, one year before Indiana Jones' search for the Ark of the Covenant, Indy tries to exchange the urn of tribal lord Nurhaci for a diamond belonging to gangster boss Lao Che in the Shanghai nightclub "Obi-Wan". The deal goes badly wrong and chaos breaks out. Finally, Indy manages to escape with the singer Willie. With a getaway car driven by the young Chinese Shorty, they can shake off Che's henchmen for the time being.
Indy, Willie and Shorty board a plane to Delhi, unaware that it belongs to Lao Che's airline. During the flight over the Himalayas, they fall asleep and Che's pilots steer the plane toward a mountain, dump the fuel tanks, and bail out with the last two parachutes. Willie wakes up and alerts Indy and Shorty so the trio can bail out in time with a self-inflating inflatable boat before the plane crashes into the mountain.
They survive the impact in the inflatable, slide down a snowy slope and land in a raging river. This leads them to a remote village in the Indian jungle. The villagers ask Indiana Jones and his companions for help: all the children of the village have been kidnapped, the sacred Shankara stone, which is supposed to protect the community, has been stolen and the well no longer gives water. Supposedly, a resurgent death cult in the nearby palace of Pankot is responsible...