Heaven and Hell were always at war
Before humans, there were only angels and demons - and they hated each other quite a bit. As it turns out, the forces of order dont take too kindly to the armies of chaos, and their evenly-matched warfare became known as The Great Conflict. It was these battles that forged warriors like the archangel champion Tyrael and spawned the grotesque legions that follow the Prime Evils. We never get to see any remnants of The Great Conflict, seeing as those wars took place eons before the events of the original Diablo, but we do get to meet some of its greatest generals and kill them.
An angel and a demon were sick of fighting, and went off to do their own thing
Never-ending war between Heaven and Hell is hell, and it can wear at even the noblest figures. Inarius, an angel on the same Angiris Council as Tyrael, got tired of it all, and decided to go into exile from Heaven to create his own domain. With the help of other defectors, including Mephistos demonic daughter Lilith, Inarius took control over the Worldstone, a powerful crystal housed in the Pandemonium Fortress (which you fight through in Diablo IIs expansion, Lord of Destruction). Using their combined powers, Inarius and his posse managed quite the godly feat: creating Sanctuary, the first corporeal world outside of Heaven and Hell, and giving birth to the Nephalem, Sanctuarys first human inhabitants.
Tyrael once thought humans sucked big time
Inarius hid Sanctuary within the Worldstone to hide it from the forces of Hell and Heaven, but conflict between Inarius and his followers eventually brought its existence to the attention of Tyrael and the forces of light. Instead of viewing the Nephalem and their descendants as a species to be nurtured, the angels were repulsed by these unknown lifeforms. Tyraels first instinct was to wipe the humans out but after observing their aspiration and will to live, the humans started to grow on the big angelic guy. He became a true ally to the people of Sanctuary, and helped us out countless times through the events of Diablo II.
The Lesser Evils gave their masters the boot
Sanctuary was supposed to be neutral territory, but the demonic forces of the underworld had different plans. Hell houses seven Great Evils in total: three well get to in a second, and four Lesser Evils. Youve got Belial, the Lord of Lies; Azmodan, the Lord of Sin; Andariel, the Maiden of Anguish; and Duriel, the Lord of Pain (the latter two are the bosses of Acts I and II in D2, respectively). They werent too pleased with taking orders from their more powerful masters, so they plotted to overthrow them and after a bloody battle, they succeeded. Azmodan and Belial bickered over who would control the remainders of Hell; its likely that well fight them in Diablo III.
Mephisto, Diablo, and Baal are the three Prime Evils
Banished by the Lesser Evils to exile in Sanctuary, the three Prime Evils are the guys you never, ever want to see in your hood. Theres Mephisto, the Lord of Hatred; Diablo, the Lord of Terror; and Baal, the Lord of Destruction (hence the D2 expansions title). These three demonic brothers command vast power, and on the plane of Sanctuary, they were without equal. Mephisto is the wily strategist of the bunch, Diablo prefers brute force, and Baal uses power in numbers. Their arrival is still pre-Diablo 1, but there would be heroes who would challenge their hellish might.
Tyrael assembled a squad of demon-catchers called The Horadrim
Recognizing the threat that the Prime Evils posed to the innocent inhabitants of Sanctuary, he assembled a Power Rangers-like super squad of the most powerful mages he could find. Among their ranks was Deckard Cains great ancestor Jered, and they were led by Tal Rasha (whose tomb you explore in D2s Act II). Their task: hunt down the three Prime brothers and trap them so their reign of terror would end. But how were they supposed to defeat such fearsome creatures as the Prime Evils? Simple: by using soulstones.
Soulstones are akin to demon-prisons
Baals soulstone was fractured during his takedown, so Tal Rasha volunteered to plunge the stone into his chest; acting as a human prison, he was buried deep within an ancient tomb. Mephistos soulstone was put under the care of a group of monks, and Diablos stone lay dormant under a cathedral that the Horadrim built to hide its location.
but they can only contain evil for so long
Trouble is, the soulstones arent 100% airtight demon-traps. The three Prime Evils influence could still be felt in the vicinity of the stones locations, and they could manipulate and persuade unsuspecting humans to do their bidding. Mephisto was guarded by the Zakarum monks of Kurast but judging from their mutated appearances and hostile tendencies in D2s Act III, he corrupted their minds without much trouble. Baals presence drew Tal Rasha insane, and as Tal Rashas body withered away in the tomb, Baal began to regain power. Diablos soulstone still remain untouched under the Horadrims cathedral, but as time passed, people forgot the structures original purpose. Tristram was founded around the cathedral, kicking off the events of Diablo 1
Tristram was ground zero for Diablos return
King Leoric ruled over the land of Khanduras, a kingdom with Tristram as its capital. With the aid of his right-hand man and advisor, Archbishop Lazarus, Leoric established his throne in the now-abandoned cathedral the Horadrim had erected, unknowingly establishing a conduit for the Lord of Terrors evil energies. Though he was unable to possess King Leoric directly, Diablo used his unseen influence to warp the mind of Archbishop Lazarus, coercing him into kidnapping Leorics son to act as a host.
