The game's epilogue, which is unlocked by completing the Skill Points list in the Guidebook, reveals what happened to various friends and enemies that Spyro encountered in Avalar, such as Spyro and Elora missing their chance to kiss, Crush being taught by the Professor how to spell, and a list of dummied enemies that didn't make it into the game. With peace returned to Avalar, Elora and the others fix the portal device, allowing Spyro to take his long-awaited vacation to Dragon Shores. Ripto then manages to steal a power crystal, which was used to power the large portal device, which he uses to create a new scepter for himself (which Gulp had eaten the original scepter in the intro by mistake), but Spyro manages to defeat him as well. Currently stranded in Avalar as a result of Ripto destroying the portal he came in through, Spyro agrees to help fight against him, gathering up talismans from the various realms of Avalar in order to confront and defeat Crush and Gulp. Pleased to find himself in a world without dragons whom he views as pests, Ripto decided to conquer Avalar, prompting Elora and the others to summon a dragon to fight against him. They explain that while experimenting with a large portal device, they inadvertently summoned an iron-fisted angry warlock known as Ripto, along with his minions Crush and Gulp. Upon going through the portal, however, Spyro ends up in the fantasy realm of Avalar, having been summoned there by Elora the Faun, Hunter the Cheetah, and the Professor. Spyro the Dragon and his dragonfly partner, Sparx, have enough with the continuous raining in Artisans and, wondering when the sun will come out, they decide to take a vacation to Dragon Shores. Each realm features a number of different worlds, a speedway world, and a dungeon in which Ripto or his minions are hiding. In every realm, there is a castle that, during the course of the storyline, is captured by Ripto. The world of Avalar is divided into three realms: the Summer Forest, the Autumn Plains, and the Winter Tundra.
The dragons of the previous installment have been replaced with an entirely new cast of characters, including fauns, satyrs, anthropomorphic animals, and robotic businessmen, among others.
Both Hunter and Moneybags make recurring appearances in the series, while Ripto would make more series appearances than any other antagonist, making him the key villain of the original series. This game introduces new characters into the Spyro series, many of whom would appear in later games. Sparx functions as the player's health meter, and assists the player in gathering gems.
The only characters from the original game to return as main characters in this game are Spyro, the game's protagonist, and Sparx, his dragonfly sidekick. The power-up can grant invulnerability or the abilities to fly, supercharge, super flame, breathe ice, or super jump to reach high up areas. In addition, each level has a power-up gate, activated after defeating a specific number of enemies in a level, which grants Spyro a temporary super-ability. Swimming lets Spyro dive underwater to reach submerged treasure and hidden tunnels, climbing lets Spyro climb up certain surfaces, and the headbash lets Spyro perform an overhead smashing attack which can break rocks and certain cages. As well as opening portals or granting access to certain areas, Moneybags also teaches Spyro three brand new abilities over the course of the game. Gems gathered throughout the game are required to pay fees Moneybags charges in order to progress through the game. These orbs are required for opening some of the portals to certain levels, as well as progressing through the third hub world. Each level also contains a certain number of orbs, which can be earned by completing secondary tasks for particular NPCs, such as lighting a series of lamps or protecting characters from attacks. In order to progress through the first two hub worlds, the player must acquire a talisman from each realm, which is awarded for reaching the end of the level, before facing the boss of each world.
The game is split up into three main hub worlds containing portals to various realms. Bottled butterflies will both completely restore Sparx's health and give Spyro an extra life. His health is indicated by the color of his dragonfly partner, Sparx, who can replenish his health by eating butterflies. Players control Spyro the Dragon as he fights against various enemies and obstacles using his flame breath, charge attack, and glide abilities.