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All nine of the Circle were originally wizards and clerics of Mystra. Around 1180 DR, the nine entered into a pact with Asmodeus who at that time was an archdevil. They offered to undertake a ritual known as the First Flensing which would extend a formal invitation to Asmodeus to enter Waterdeep. In exchange the wizards would receive the gift of immortality. The wizards reneged on the deal and were changed into their current form and bound to a location in Pharra's Alley.
For many years, the Circle was merely a local curiousity. The skulls would occasionally materialize and shoot flames at passersby but they rarely did any real damage. In Nightal 1480 DR, a dark Angel serving Asmodeus, an archmage at the House of Wonder and the Circle of Skulls all attempted to complete the ritual of the First Flensing although they were actualy working at cross purposes to each other.
The ritual was thwarted by the deva Jinnaoth and his allies. The exact fate of the Circle is unknown although they appear to have been significantly weakened from their battle with Jinnaoth's friends.
The Circle seem to retain most of the knowledge they possessed as wizards, although they are not as powerful as most liches. They have difficulty coordinating their spellcasting efforts which may be the reason for the limits to their powers.
The skulls materialize as a circle of nine flame skulls wreathed in green flame.