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Not quite. If I recall after all the crap that's been thrown at the New Republic from the Empire remnants to the Yuzon Vong (SP?) to the Betrayal and on, the good guys just got worn down. Enter Darth Krayt and the forces he's amassed over a period of time and you have a destabilized galaxy ripe for the conquering. As for the Sith being trounced... well, how many times have the Jedi been 'trounced' and then came back from the edge of extinction, who's to say they're more thorough then their enemies when purging their foes from the Galaxy.
Spoilers for anyone that hasn't read the Legacy comics:
The Republic makes peace with the Imperial Remnant, which are Imperials that aren't led by Dark Sider so much as just systems that like the old style of military and strong central government.
The Imperial Remnant believes that they need a new Emperor, and a group of Jedi decide that if there is going to be a viable, non-evil Empire, the Empire should have Light Side Force users to guide and aid them as well, and thus the Imperial Knights are born.
One Jedi that survived Order 66 pretty much snapped, searched out old Sith Holocrons, and fused himself with Vong technology to prolong his life. He abandons the Rule of Two (heck, all of his holocron training is from long before that) and starts a new Sith Order, the One Sith.
The Jedi decide to give the Yuuzhan Vong a chance to redeem themselves, and they start working with the Vong to terraform worlds that they destroyed during the war. The Sith begin to sabotage this effort to make it look like the Vong are destroying worlds again and the Jedi are either incompetent or helping them.
The Sith work with the Moff's Council in the Empire to declare war on the Republic, since they harbor the dangerous Vong, and the Moff's Council reduce the Emperor to essentially a figurehead. The one thing the Emperor can do is command the Imperial Knights, and he commands them to stay out of the war.
The Republic falls apart, the Sith slaughter all of the Jedi at the various Temples and schools across the galaxy. Darth Krayt orders the Emperor killed and places himself on the throne, although Emperor Fel actually escapes and Darth Krayt actually has a body double killed.
The Jedi, remembering Order 66, set up what they call the Hidden Temple, which is a place where Masters and Knights regroup in a disaster, so while the Order is thinned out and can't act openly, they still survive.
Emperor Fel still commanded the loyalty of a bunch of the Empire, and when its learned that the Sith tried to kill him and he escaped, he pulls off a group of Imperials that are loyal to him, he takes over Bastion and fortifies it, and has some of his own Imperials and his Imperial Knights aiding him.
One Admiral, Gar Stazi, managed to save his battle group and still flies around the galaxy opposing the Empire as well.
Oh, and Black Sun more or less controls the Outer Rim.
So in the end, you have one major bad guy faction and three good guy factions that don't really trust one another. Gar Stazi doesn't know that Emperor Fel wasn't part of the decision to go to war, the Imperial Knights think the Jedi have lost their edge, and the Jedi are afraid that the Imperial Knights are being tempted by the Dark Side.
So basically, the good guy factions might be able to defeat the Sith and the Empire if they could all actually trust one another long enough to put up a fight.
That's a pretty good summary, does this book cover all that story line, how do you like it?
Yeah, I'm pretty happy with it. My current campaign is in the KOTOR era, but my next one, should the whole group stay together, will likely be a Legacy era game.
There are some nice rules for adding the "antiquated" template to items from other books and how to rework them into "normal" equipment, meaning that you can pretty much use anything from any of the Saga books in this era.
Plus, the way the material is presented, it doesn't hit on Cade Skywalker too much (my least favorite aspect of this era).
The Legacy destinies are kind of fun as well. Basically, instead of a general destiny to do something in the campaign, you are a member of some famous family that has done major things in the past, and you choose to either embrace or defy your legacy.
I was up in the air over whether to run in this era or KOTOR, so I'd have to endorse this as a good purchase.
As far as the timeline covered, there is more detail towards the back end of the timeline, not so much about the founding of the Imperial Dynasty or the Imperial Knights or any of that. From the Comics perspective, its current up to the Vector storyline.