Ok, so this is a question that I've had since I first saw this game and one that I still haven't found a satisfying answer for. To understand why this is such a big deal we need to go back to DtP's ending, so there will be spoilers for that game, but I believe everyone here already knows everything about that game.
Ok so at the end of Klonoa 1, Hewpoe reveals that Klonoa's memories about their friendship and their life together were fake and merely implanted into Klonoa as a way to help him carry out the task of defeating Ghadius and Nahatomb. After that is revealed, Klonoa is forcibly taken out of Phantomile.
Here's where the issue begins: despite the ending of that game, Hewpoe somehow is in Empire of Dreams and this creates a big problem for the timeline. That game can't take place after DtP since the dialogue they have when they meet again in Dream Traveller of Noctis Sol implies that this is the first time they've met since that game. At the same time, it can't take place before Klonoa 1, since every event that took place before DtP and involved both Klonoa and Hewpoe is a fake memory.
The only solution I see here is that the game as a whole is simply one of the fake memories implanted into Klonoa's mind, but everything in that game feels very real and solid, so that's unlikely. So... can someone think of a solution here, because, honestly, I don't see any.