Lost Odyssey is set in a world in which a "Magic-Industrial Revolution" is taking place. While magic energy existed in all living creatures beforehand, it suddenly became far more powerful thirty years before the beginning of the game. Because of this, it has affected society greatly, with devices called "Magic Engines" harnessing this power for lighting, automobiles, communication, and robots, among other uses. While previously only a select few could wield magic, many magicians gained the ability. However, such progress has also caused two nations to develop new and more powerful weapons of mass destruction. The kingdom of Gohtza and the Republic of Uhra (which recently converted from a monarchy). Uhra is building Grand Staff, a gigantic magic engine, while the heavily industrialized Gohtza actively pursues magic research of their own. A third nation, the Free Ocean State of Numara, remains isolated and neutral, though it is falling into disarray due to a general attempting to stage a coup d'etat. Uhra, at war with Khent, a nation of beastmen, sends its forces to the Highlands of Wohl for a decisive battle at the start of the game.
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