During the intro, a news team sets up an interview with a couple of dragons within the Artisan World, one of five realms in the Dragon Kingdom (the others of which include Peace Keepers' world, Magic Crafters, Beast Makers, and Dream Weavers) which have lived in harmony for years.

When the reporter asks about Gnasty Gnorc, a gnorc (half gnome and half orc) who lives within his own, sixth realm, one of the dragons cockily describes him as an ugly, simple minded creature who poses no threat to the Dragon Kingdom. However, Gnasty is watching the live feed from his home world and, enraged by the insults, uses a magic spell to encase all dragons in crystal and sends out his hordes of gnorc soldiers.

One dragon, Spyro, is able to avoid the attack due to his more short-bodied appearance in comparison to the much larger dragons. Aided by his dragonfly companion, Sparx, Spyro vows to rescue his dragon brethren and defeat Gnasty Gnorc once and for all. He visits each of the dragon realms in sequence, freeing trapped dragons, collecting treasure, and rescuing dragon eggs from pesky thieves within each realms' portal worlds before facing realm bosses.

He then makes his way to Gnasty's Junkyard World where he fights his way through two precursor portals before confronting the Gnorc leader himself.
After he defeats Gnasty, an ending clip shows him back in Artisan World discussing his victory with the news reporters.

After the credits, Spyro appears back in Gnasty's Junkyard World where he frees one last dragon who points him to Gnasty's treasure portal which will only open once the player has completed 100% of the game; collecting every bit of treasure and rescuing all dragons and dragon eggs.

Once Spyro has reached 100% and collected everything within the treasure portal, an alternate ending plays where Spyro is, again, interviewed by the news reporters just as another magic spell comes in and crystallizes the dragons. Spyro's last statement is, "Here we go again."

Ralph's edit: Spoiler alert...