The game starts with Master Eon greeting the young player, who is the new Portal Master, and explains to them the world of Skylands, a world filled with wonder and mystery where the Portal Masters and the Skylanders kept peace and balance so that all creatures can thrive. But Skylands is in grave danger, and it needs the help of the new Portal Master. Afterwards, the new Portal Master and the Skylanders meet up with Hugo, Eon's assistant, and Flynn, the balloonist, on the Shattered Island and save the villagers from a freak tornado ravaging their town, revealing the return of the Skylanders. As they make their way to the Ruins, Hugo explains to the new Portal Master how Skylands became its current state.

The Portal Masters had protected Skylands for as long as anyone could remember. Master Eon, the last good Portal Master of Skylands, and his Skylanders guarded the Core of Light, a great machine that enriched Skylands and repels The Darkness, the ultimate force behind all evil. However, Kaos, an evil 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, and just as they were winning the battle, Kaos unleashed a mysterious creature that successfully destroyed the Core, causing the Skylanders to be banished from their world. As the Skylanders drifted farther away from the magic of Skylands, they began to shrink until they reached Earth, where they were turned into toys as a result of that world having no magic and awaited for the new Portal Master to find them. Master Eon survived the destruction of the Core of Light, but became a spirit and couldn't fight the Darkness without his physical body. He then waited for the arrival of a new Portal Master until one finally arrived: the young player.

After saving Cali from a group of evil Drow, Hugo begins with tasking the Skylanders in recovering the missing Eternal Sources needed to rebuild the Core of Light.