The Cooper Gang made their way to China to track down the Panda King. Along the way, Sly learned that the Panda King was born a poor child, but was always amazed at the fireworks rich noblemen set off every New Year. After spending ten years learning the art, he tried to offer his fireworks to the noblemen, but they chased him away because of his shabby clothes.
Humiliated, the Panda King decided to seek revenge on those who shunned him by using his explosives to destroy several villages throughout China. He was recruited by the Fiendish Five as their demolitions expert. From that point on, his explosive touch became feared worldwide. He has created a giant panda statue of himself, which is where he practices his new firework technique, Flame Fu.
|"A Perilous Ascent"|
|Sly and the gang arrive in China, where the Panda King resides. Sly spots his giant statue and must find a way up there.|
|"Inside the Stronghold"|
|This the main hub of the episode. Sly needs to find a couple of more treasure keys to open a ceiling hatch. Then, he must collect more keys to unlock a set of rockets to reach the statue.|
|"Flaming Temple of Flame"|
|Sly enters a huge temple, which happens to be a training ground. Sly must use the best of his agility to retrieve another treasure key.|
|"The Unseen Foe"|
|This area is perfect for Sly's Invisibility Move. Sly must use it to sneak past several guards and spotlights, and also do some serious climbing to obtain another treasure key.|
|"The King of the Hill"|
|Sly protects Murray with a turret as he travels up the mountain to a key.|
|"Rapid Fire Assault"|
|Sly uses a vehicle similar to the one in the previous episode. He must use it navigate through a long path to the treasure key.|
|"A Desperate Race"|
|Once again, Murray must win a three-lap race to obtain another treasure key.|
|"Duel by the Dragon"|
|Sly enters an area with a huge dragon statue. He runs into Carmelita again and must avoid her fire while making his way to the key.|
|After collecting all of the Panda King's treasure keys, Sly faces him inside his giant statue. Once he is down, Sly recovers another page of the Thievius Raccoonus and discovers the location of the next and final Fiendish Five member, Clockwerk.|
After retrieving the Panda King's section of the Thievius Raccoonus, Sly was able to learn about his technically-minded ancestor, Otto van Cooper. While not known for his physical dexterity, Otto relied on vehicles to aid in his criminal endeavors. Armed with his designs, Sly was sure that Murray will be able to make some cool modifications to the Cooper Van.
A frustrated Inspector Fox, having missed Sly coming down the mountain, threw the Panda King in jail, which put an end to his avalanche protection services, and ensured the safety of mountain villages throughout China. The Cooper Gang then took a little time off and did some shopping in Hong Kong. Thoroughly relaxed, the gang went home to plan their next move.
- Mandrills - King Pao
- Nunchuck Monkey
- Gorillas - General Tso
- Kung Fu Chimp - Chow Mei
- Apes - Andre and Won Ton
- Fire in the Sky was supposed to be the first episode of the game, instead of "Tide of Terror." Sucker Punch Productions developed "Fire in the Sky" after developing all of the other episodes because they assumed their experience in building the other episodes would help make the game's first episode "exceptionally good." However, this backfired. In focus tests a few months before the game's release, players found "Fire in the Sky" to be too difficult and could not even make it past the first job, "A Perilous Ascent." Sucker Punch decided to push "Fire in the Sky" to the fourth episode and created a new move to learn for the episode, namely Invisibility.
- Ironically, the name of the level mentions fire, while the level takes place in the snowy mountains. This goes vice versa for "The Cold Heart of Hate," where it mentions the cold, but the level takes place in a volcano.
- This is the only episode in which the episode's boss did not mention the next member of the Fiendish Five.
- This episode has a second part in the Sly 3 episode A Cold Alliance, when the gang needs to free the Panda King's daughter so he will become their demolitions expert.
- The way the gang did their shopping in the getaway of this episode is used again in Sly 3, but the difference is that in this game, it takes place in Hong Kong with just the three of them. In Sly 3, it takes place in Shanghai, and Penelope, Panda King, and the Guru is with them.
- The music for the "Unseen Foe" mission is the same as Raleigh's boat from "Tide of Terror."
- This is the first and only episode in the game in which the music for the setup movie continues into the title screen.
- This is the first episode in which the main antagonist is seen on the title screen.
- In the Panda King's line "Why should you care if I bury a few worthless village in snow," he says "village" in singular form, when it should be plural. However, it is spelled correctly in the subtitles. This could be attributed to English being the Panda King's second language.
- On the top left corner of the newspaper in this episode's ending "The Panda King on Ice," the headline says "Dude! That's Kickass." This is one of the few times a profanity appears in the series.