The game begins with a village in Skylands being ravaged by a massive tornado. A small, bookish fellow named Hugo mentions the destruction of the "Core of Light" and an individual called "Master Eon". A Skylander is sent down to the village by the player and proceeds to save the villagers.
Following the rescue, the player is introduced to the Ruins and some of the game's backstory is explained. The Portal Masters had protected Skylands from "The Darkness" for as long as anyone could remember, with the help of their own legions of noble, powerful warriors called "Skylanders". Master Eon, the last good Portal Master in Skylands, and his Skylanders guarded the Core of Light, a great machine that enriched the world and repelling The Darkness, the ultimate force behind all evil. However, Kaos, a Dark Portal Master who attempted to destroy the Core of Light in the past, returned from his banishment in the Outlands to destroy the Core to rule Skylands as its emperor, knowing that Eon has grown weaker with age. The Skylanders fought against Kaos' minions to protect the Core of Light. Just as they were winning the battle, Kaos initiates "Plan Z" by unleashing a mysterious creature that successfully destroyed the Core, allowing The Darkness to take over and causing Eon to become a spirit without a physical body and his legion of Skylanders, including the purple dragon Spyro, to be banished from their world. As the Skylanders were drifted farther away from the magic of Skylands, they began to shrink and petrify until they reached Earth, where they were turned into a toy-like state as a result of that world bearing no magic. Though Master Eon did survive the destruction of the Core of Light, he couldn't fight Kaos and the Darkness as a spirit. He and his Skylanders then awaited for the arrival of a new Portal Master until one finally arrived: the player, who finds the Skylanders.