The story of Fate of Atlantis is set in 1939, on the eve of World War II. At the request of a visitor named Mr. Smith, archaeology professor and adventurer Indiana Jones tries to find a small statue in the archives of his workplace Barnett College. After Indy retrieves the horned figurine, Smith uses a key to open it, revealing a sparkling metal bead inside. Smith then pulls out a gun and escapes with the two artifacts, but he loses his coat in the process. The identity card inside reveals "Smith" to be Klaus Kerner, an agent of the Third Reich. Another pocket of the coat holds an old magazine containing an article about an expedition on which Jones collaborated with a young woman named Sophia Hapgood, who has since given up archeology to become a psychic.

Fearing that she might be Kerner's next target, Indy travels to New York City in order to warn her and to find out more about the mysterious statue. There, he interrupts her lecture on the culture and downfall of Atlantis, and the two return to Sophia's apartment. They discover that Kerner ransacked her office in search of Atlantean artifacts, but Sophia says that she keeps her most valuable item, her necklace, with her. She owns another of the shiny beads, now identified as the mystical metal orichalcum, and places it in the medallion's mouth, invoking the spirit of the Atlantean god Nur-Ab-Sal. She explains that a Nazi scientist called Dr. Hans Ubermann is searching for the power of Atlantis to use it as an energy source for warfare.