Long ago, the old gods created the world of Tessera, a vast and geologically diverse land shaped like a tesseract, which would become home to 8 kingdoms. Empires have risen and fallen since then, and in present times the emperor has fallen under the influence of the evil Archmage. Thanks to his influence, the kingdoms have become destitute, a plague has swept the land, and the people have become oppressed. The hero of this story lives in the town of Thurin, in the kingdom of Calia, which is somewhat out of the Archmages range of influence. However, when a gravely wounded kobbold delivers a message to him and dies on the threshold of his house - to find the artifact to wake up the mysterious god NGnir - the game begins.

Sleeping Gods Lie combines elements of action and RPG-style gameplay. The entire game world is viewed from first person perspective, rendered in fake 3D. The player explores this world, finding items, solving occasional puzzles, and getting closer to the goal. Enemies will often attack the hero; the key to victory is usually the power of the weapon the hero wields. These are a variety of ranged weapons, from slings and bows to magic staffs. Combat is entirely action-oriented. Experience points are granted upon victory, and increase the players health and magic power.

The game has its own clock and calendar, consisting of 17 months named after the games gods, each consisting of 17 days of 12 hours. In the Amiga and ST versions, during the 3 night hours, the screen turns dark, but the DOS version remains consistently daylight.