At the end of Sonic the Hedgehog 2, the evil Dr. Robotnik had his Death Egg downed from orbit by the heroes, Sonic the Hedgehog and his companion Miles "Tails" Prower. Having not been completely destroyed after all, the Death Egg has crash-landed on the Floating Island, taking it to the ocean below. This island has special properties - not least of which being its eponymous power of magical suspension. When Dr. Robotnik detects the presence of a massive Chaos Emerald within the island's depths, he decides to once again seek out the Chaos Emeralds so that his fallen Death Egg can regain orbit in space. Turning his crushing defeat into a sleek advantage yet again, he kidnaps Animals to convert into Badniks and created a new line of weapons.

Meanwhile, Knuckles is taking his usual walk along the Emerald altar to check if the Emeralds are alright, suddenly a huge earthquake came out of nowhere, Knuckles saw the Emeralds reverberating in mid-air, stunned, he was suddenly threw into the air before blacking out. When he woke up, the Chaos Emeralds were gone, but Knuckles also saw a huge egg in the distance, surprised, he then recalled a legend of an ancient dragon sent to destroy the world in the end times, thinking this mysterious egg to be the dragon he set out, and... A giant egg-shaped figure appeared out of nowhere, calling himself "Dr. Eggman", he explained to Knuckles he had come here to study this giant egg, and that an evil hedgehog named Sonic was trying to not only interfere with his research, but steal the Chaos Emeralds as well. Knuckles, duped by the doctor, ran off to find this miscreant. Eggman smiled at himself, pleased at his ability to lie.

Immediately after the event of Sonic 3 where Dr. Robotnik's orbital weapon, the Death Egg, is damaged in a battle with Sonic and crash-lands back onto Angel Island. Sonic travels through each zone looking to retrieve the Chaos Emeralds to defeat Robotnik, and once again comes into conflict with Knuckles, who believes Sonic is trying to steal the Emeralds for himself. In Hidden Palace Zone, Sonic fights and defeats Knuckles. The two hear a disturbance outside of the chamber, and go out to find Dr. Robotnik stealing the Master Emerald, the secret to the island's levitation powers. Knuckles attempts to attack Robotnik, but is electrically shocked in the process, and is trapped with Sonic in an underground passage. Knuckles, realizing Sonic is on his side, shows him a portal that leads them to Sky Sanctuary, where the Death Egg is relaunching. Sonic proceeds to infiltrate the Death Egg, and defeats Robotnik as Super Sonic.

Knuckles' story, which takes place after the events of Sonic's campaign, begins in Mushroom Hill,[b] where he is relaxing with his animal friends but is interrupted by a bomb dropped by EggRobo. This prompts Knuckles to chase after him, leading him through more difficult versions of most of the same zones Sonic went through. The chase ends at the damaged remains of Sky Sanctuary, where a robot called Mecha Sonic attacks Knuckles but accidentally destroys EggRobo instead. After a short fight, Mecha Sonic uses the power of the Master Emerald to achieve a Super form similar to Sonic's. Knuckles manages to defeat Super Mecha Sonic, who explodes. Sonic flies in piloting the biplane Tornado and Knuckles hitches a ride to return the Master Emerald to Angel Island. If all the Chaos Emeralds are collected, Angel Island rises upwards, into the sky. However, if the player has not collected all the Chaos Emeralds, Knuckles cannot redeem the Master Emerald, and Angel Island plummets into the ocean.