A flashback. There are villagers in a foreign time running and screaming "Inuyasha!" Suddenly, a demon appears with pure white hair and yellow eyes appears. He laughs evilly and breaks through their attempts to stop him. He then smashes into a temple and steals a strange sparkling purple jewel from a stand before the villagers catch up to him and shoot arrows at him trying to kill him. He dodges these easily and takes off for the forest, claiming how he can finally become a full demon with the jewel he has, but before he can make it out of reach of the small village, a pretty young woman wearing Shinto priestess clothing shoots and arrow into his heart slamming him back against a tree. The woman, who's seriously wounded, picks up the dropped jewel and the demon boy, who she called "Inuyasha" seemingly dies, still pinned to the tree.
The woman, who's name is announced as "Kikyou", instructs her younger sister and the villagers to burn the jewel with her remains so that it will never fall into the wrong hands again. She then dies from the wounds and we see her body surrounded in flames as she is cremated. She thinks to herself that she will take the "Shikon no Tama" with her into the otherworld and disappears.
Modern day Tokyo, year 1997. A young girl named Kagome is sitting in a shrine with her grandfather who is explaining the history behind the jewel called the Shikon no Tama that the family's ancestors protected in the past. Kagome stops him sort and asks him if he remembers what day tomorrow is. He tells her that he does and gives her a birthday present. It's a mummified kappa hand (demon). Kagome's not that impressed and gives it to her cat, Buyo, to eat.
The next day, Kagome is off to school and finds her younger brother, Souta, staring into a small shrine that holds the concealed well. Souta tells her that their cat went in there and hadn't come back out, so Kagome goes in to find the lost kitty when suddenly the sealed well starts to shake and a centipede monster emerges and drags Kagome into the well claiming that she smells the Shikon no Tama.
Kagome is dragged through the magical well and manages to fend the monster away by shooting some sort of power out of her hands. She lands at the bottom of the well freaked out and looks back up calling for her brother (she thinks she was dreaming) to help her get back out of the well. No one answers, so she climbs out herself and finds herself in a deep forest. She runs towards the huge tree that was kept near her family shrine (she calls it the Goshin Boku or God Tree) and finds out that she's not in Tokyo anymore. Pinned to the tree is Inuyasha, who's still asleep. Vines have grown all over him, meaning he has been asleep for a long time, but other than that, he hasn't changed at all.
Interested in this strange boy, Kagome goes over and plays around with his dog-ears for a moment before she is shot at by villagers who take her in thinking she's a spy or a kitsune (fox spirit). An old woman appears (Kaede) and she claims that Kagome resembles her long dead sister, Kikyou. This old woman is Kikyou's younger sister grown up since Kikyou died fifty years ago. (Inuyasha's been pinned to the tree for that long in suspended animation. So he didnt really die.).
Kagome tells her she's from Tokyo, but Kaede knows nothing of this "Tokyo". Suddenly, the village is attacked by the same centipede monster that attacked Kagome in the well. It claims it wants the Shikon no Tama and that Kagome has it. Kagome takes off trying to get the monster away from the village and runs back towards the forest where she came from. The monster follows her and she falls in front of the now awakened Inuyasha. Her voice had caused him to wake up! Inuyasha asks "Kikyou" why she doesn't just finish him off really quick and then asks why Kagome is just sitting around doing nothing.
Kagome tells him she's not this Kikyou girl and her name is Kagome. The centipede attacks again and Inuyasha asks Kagome to remove the arrow in his heart. Kaede warns Kagome not to, but after Kagome is slammed into the tree by the monster and after it bites into her hip and removes the Shikon no Tama from her body, she cedes and pulls the arrow. The arrow disappears in a flash of light and the seal is broken! Inuyasha starts to laugh evilly and destroys the centipede with one swipe of his claw using his technique, the Sankon Tessou (Soul Shattering Iron Claw). Kaede then removes the Shikon no Tama from the centipede's body (it had consumed it) and hands it back to Kagome.
Inuyasha then claims he wants the jewel from her and will kill her if she doesn't hand it over. Kagome stands there in shock. So, Inuyasha wasn't a good guy after all, was he? O_o
