Skylanders: Giants builds upon the fundamentals of the first game, which merges a line of physical toy figures with a video game world. The game will introduce over 40 new toy figures, some of which are more than twice the size of the original Skylanders cast in both physical and virtual form. The game involves connecting a physical toy to the video game console through a "Portal of Power"; whichever toy is used creates a respective character in the game. Toy figures from the first game are also forward compatible with Giants, although there are also new versions, called "Series 2", which have more powerful attributes than the originals. A new series of figurines called "Light core" was also introduced, which glow when put on the Portal of Power. The game has a new and improved "Battle Mode", for head-to-head play, featuring more areas and gameplay options as well as offering a new variety of alter ego Skylanders.

Thousands of years ago, Tree Rex, Crusher, Bouncer, Swarm, Hot Head, Eye Brawl, Thumpback and Ninjini fought the Arkeyans, but the Iron Fist of Arkus used the last of its power the banish them to Earth. Now, with a new threat looming, Jet Vac, Cynder, Pop Fizz and the rest of the Skylanders must unearth and join forces with them to rebuild Flynn's new ship, the Dread Yacht and get the Iron Fist before Kaos does in the ultimate battle to save Skylands.

The plot of this game is focused on how the history of the Skylands comes alive again in the present. The main villain from the last game, Kaos, finds himself in a toy store. He finds a Portal of Power, and goes back to the Skylands. the first level takes place 10,000 years ago to discover where the Skylanders and the Giants came from. 10,000 years ago, the Skylands were ruled by an evil race of giant robots called Arkeyans, until the Skylanders made a stand and began war with the Arkeyans. Eventually, the Giants, who were the first ever Skylanders, faces the king of the Arkeyans and removes the source of the Arkeyans' power, the Iron Fist of Arkus, but this victory also sent the Giants to Earth, ready for the player to use them.

The player is sent out on a quest to rebuild Flynn's ship, and get to the Lost City before Kaos. Multiple new characters show up throughout the levels, including Ermit the hermit and Brock the gladiator. Ermit reveals that Kaos has returned and has accidentally awakened an ancient Arkeyan robot, which recruits Kaos as its new leader, and goes on the search for the Lost City of Arkus. Ermit also reveals that he has a giant robot of his own, however, while attempting to activate the robot, the player encounters a "machine ghost" which turns out to be the very soul of Ermit's robot, who also joins the Skylanders on their journey.

The Skylanders travel to an ancient vault which is said to contain a map to the city of Arkus, but Kaos arrives and attempts to crush the player under fallen rocks, but in an effort to save the player Ermit's robot sacrifices himself by shielding the Skylanders from the falling rocks. Kaos and his robot travel into the vault to find the map, but they are destroyed as a result. Glumshanks, Kaos' butler, remembers an image of the map, and with Kaos' help. finds the location of the lost city. Meanwhile, machine ghost tells the player to go after Kaos and find the lost city , before disappearing, presumably dead.

However, Kaos eventually finds the Lost City of Arkus. When Kaos enters a powerful, robotic fist, he transforms into a large robotic version of himself. The player must now find their way into the place where Kaos is, and defeat him. In the last level, the player must run down a long path, avoiding punches from Kaos. In the last part of the level, Ermit and Machine ghost who survived the landslide, return to help the player defeat Kaos. During the battle, the player must avoid dangerous magic, smaller enemies, robotic Kaos, all the while attempting to destroy the robotic fist containing Kaos.

After the level is completed, Kaos is rescued by Glumshanks as the Arkeyan robots start to tumble down after losing their power source. However, the two escape in an Arkeyan robot (which too is losing power). The robot slowly loses power, and then crashes into a nearby floating island.

Post-credits, Kaos and Glumshanks are shown entering Kaos' Kastle. There they run into Kaos's mother, whose shadow is only shown, as we are left to wonder what happened next.