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Centuries ago in Persia, at the time of Caliph Harun-Al-Rashid, boastful Sinbad the Sailor regales his doubting comrades with yet another tale of adventure: One day, near the port city of Basra, Sinbad and his faithful friend Abbu lay claim to a foundering baggala, or ship, whose crew has died from poisoned drinking water.

On board, Sinbad is thrilled to discover a map he believes shows the way to Alexander the Great's legendary treasure-filled island, Deryabar.  Sinbad is also excited to find a stained glass window depicting the same island scene engraved on a medallion he has been wearing since childhood.  Assuming that the baggala belongs to Prince Ahmed, the lost ruler of Deryabar, Sinbad, who knows nothing about his parents, courts the possibility that he is Ahmed.  Sinbad feels his destiny is to sail the ship to Deryabar and is therefore distraught when the map suddenly disappears.

Before Sinbad can set sail from Basra, he learns that a newly enacted law requires that all found property must be offered at public auction before the finder can claim it.  Sinbad tries to discourage any potential buyers by describing the ship as cursed and is annoyed when a veiled woman begins bidding on it.  Sinbad outbids the mysterious woman, who then invites him to her home, and uses money that Abbu has pilfered from the auctioneer to pay for the baggala.  Unknown to Sinbad, the woman is the beautiful but greedy Shireen, mistress to the ambitious Emir of Daibul.  Shireen assumes that Sinbad, who is wearing some of the fancy clothes he found on the baggala, is Prince Ahmed and therefore must know the way to Deryabar, while Sinbad assumes that Shireen's interest in the baggala indicates that she knows the way.

When Sinbad meets Shireen at her house, however, he woos her with his simple charms, and she feels her greedy desires evaporating.  After Shireen warns Sinbad against pursuing the treasure, an assailant hiding behind a curtain tries to stab the sailor.  Although Sinbad is unable to catch his attacker, he does secure his scimitar, which bears the inscription "Jamal," the name of a legendary underworld figure.  Undaunted, Sinbad hires a crew and sets sail for Deryabar the next day.

While sailing, Sinbad notices a parrot, who had led him to Shireen's house the night before, fly from his baggala to another ship and deduces that Shireen is on the ship.  Ignoring the warnings of his newly hired barber, Melik, Sinbad follows the slave-driven ship to Daibul and tracks Shireen to the Emir's guarded palace.  Sinbad sneaks into Shireen's quarters, but is soon arguing with her about Deryabar.  Shireen becomes insulted when Sinbad accuses her of pure greed and alerts the guards to his presence.

After a long chase through the palace, Sinbad is caught and brought to the Emir, who is surprised to learn that he is the "Prince."  While the Emir, who also assumes that the Prince knows the way to Deryabar, entertains Sinbad, Sinbad performs a trick with a smoking lamp to kidnap Shireen and flee the palace.

Once on board his baggala, Sinbad and Shireen both realize that the other is ignorant of Deryabar's location, and Sinbad finally confesses his true identity.  Although Shireen, who grew up hearing stories of Sinbad's exploits, is impressed by his revelation, she becomes infuriated when he continues to treat her like a gold digger.  Melik, who has told Sinbad that he saw and partially memorized the stolen map to Deryabar while in Daibul, then offers to direct the ship, which is being pursued by the Emir.  As they steer into a fog, a traitorous sailor alerts the Emir to their whereabouts and sets the baggala on fire.  Just before the Emir rams their ship, Sinbad is attacked by the traitor, and while he is unconscious, Shireen removes his medallion, which she believes is cursed, and gives it to the Emir.

Alerted by Shireen that Melik knows the island's location, the Emir begins to beat the barber, then tells Shireen that to prove her loyalty to him, she must watch Sinbad slowly die.  Sinbad out-maneuvers the Emir, however, and using Jamal's hidden scimitar, demands the return of his medallion.  At that moment, Melik reveals himself to be Jamal, and Sinbad, captured once again, suddenly realizes that the ship is approaching Deryabar.

Among the ruins of Alexander's palace, Sinbad, the Emir, Shireen and Melik meet Aga, Ahmed's father.  After Sinbad shows him the medallion, Aga explains that, to protect his young son from vicious hordes of treasure seekers, he left him with sailors.  The baggala, he explains, belonged to an impostor.  Although the wise Aga tells the group that the treasure resides in the mind and the heart, Melik threatens to kill Sinbad unless he discloses its "true" location.  Sinbad then insists that he found the medallion in a bazaar, and he and the Emir force Melik to drink from a vial they suspect contains the same poison used to kill the baggala's original crew.  Because Melik is apparently unharmed by the potion, Aga reveals the treasure's hiding place and embraces Sinbad as his son.  While the Emir and Melik revel in their newly found wealth, Sinbad escapes and rescues Shireen, who has confessed to loving him, from the Emir's ship.  Melik then succumbs to his own poison, while the Emir is killed by a fire bomb launched at him by his mutinous slave crew.

His tale completed, Sinbad laughingly shows his skeptical listeners some of Alexander's booty and sets sail with Shireen at his side.