Ash Shah's The Animation Picture Company has optioned the rights to Spyro from Vivendi's Sierra Entertainment division.
John Davis (I, Robot, Eragon) will produce The Legend Of Spyro, which has just started production. Creative work will be done out of Los Angeles and animation will be done in Korea.
The project is budgeted at $20m and will be readied for 2009 delivery and release.
Velvet Octopus previously worked with TAPC on The Reef, which was sold to the The Weinstein Company for North America and Warner Bros for the UK.
As a game franchise, Spyro has generated more than $525m in sales worldwide since its launch in 1998.
The film's story will follow Spyro, a friendly purple dragon, who tries to save his fellow dragons from the Dark Master's reign.
The project will be available for both digital 3D and traditional release.
Velvet Octopus' AFM slate also includes The Secret of Moonacre (previously titled The Moon Princess) by Gabor Csupo; Kate Bosworth-starring Veronika Decides To Die; and Peter Howitt's new adaptation of David Copperfield with Colin Firth and Julie Walters newly added to the cast alongside Rowan Atkinson.