After Sonic the Hedgehog and Miles "Tails" Prower defeat Dr. Robotnik at the end of Sonic the Hedgehog 2, his space station, the Death Egg, crash-lands on a mystical floating landmass called Angel Island. As Robotnik begins to repair the damaged station, he meets up with Knuckles the Echidna. Knuckles is the last surviving member of an ancient echidna civilization that once inhabited the island, as well as the guardian of the Master Emerald, which grant the island its levitation powers.[1] Knowing Sonic and Tails will try to track him down and realizing he can use the emerald to power the ship, Robotnik dupes Knuckles into believing Sonic is trying to steal the Master Emerald.

Meanwhile, Sonic and Tails approach Angel Island in their biplane the Tornado. Sonic, possessing the emeralds from the events of Sonic the Hedgehog 2, jumps off the plane and turns into Super Sonic, zooming towards the island. When they arrive, Knuckles ambushes Sonic from underground and knocks the Chaos Emeralds from him, returning him to normal; he then steals the emeralds from them and disappears inland.[1] As Sonic and Tails travel through the levels, they frequently encounter Knuckles, who hinders their progress with various traps.

At the Launch Base Zone, Sonic uses a spare Egg-O-Matic to travel to the Death Egg, and ends up encountering Knuckles on a girder. As usual, Knuckles tries to stop Sonic, but is defeated when the Death Egg re-launches and the girder collapses, sending Knuckles plummeting into the water. Sonic continues to a deck on the Death Egg, where he fights and defeats Robotnik's Big Arm machine. The Death Egg is damaged and falls out of orbit, after which it explodes.[2]