For those who have not completed Xenoblade Chronicles, this page or section may contain spoilers regarding the plot. Discretion is advised.
The Battle of Sword Valley was an important event that took place one year prior to the events of Xenoblade Chronicles. It is during this battle that the player (who controls Dunban during this section of the game) learns how to use the Monado. This event is the prologue of Xenoblade Chronicles.
The battle took place at Sword Valley, where the Homs tried to prevent the Mechon from attacking Bionis. The Mechon attacked in droves, forcing the Homs armies to fall back. In the process all of the colonies except Colony 6 and Colony 9. However, just as things got dark, Dunban cut through the army with the Monado, with Dickson and Mumkhar coming after him to assist. Unfortunately, Mumkhar — to the horror of Dunban and Dickson — deserted and fled, only to be presumably killed by the Mechon. Dickson and Dunban were victorious in the battle, as the Mechon failed to reach Bionis. Unfortunately, Dunban lost the use of his right arm for the victory. The event is referenced many times by the various characters at different points.
While Shulk and his party go to the Mechonis Core to fight Egil, the Allied Force of Bionis leads an attack on Galahad Fortress. This becomes the Second Battle of Sword Valley, and is fought between the Allied Force — the Nopon, Homs, and High Entia — and the Mechon. Alvis realises that Mechonis is awakening, and Kallian orders a full retreat as Mechonis removes its sword from Bionis' body, effectively ending the battle.