In Phantasy Star Online Episodes I and II, the spaceship Pioneer 2 arrived at the uninhabited planet Ragol in hopes of colonization in response to the failing ecosystem of the home planet Coral. In Episode III, Pioneer 2 remains in orbit above Ragol, but still has not begun colonization. The inner strife of the government of Pioneer 2, which has since gained independence from Coral, in addition to the exploitation of the planet's resources prevent colonization.

The government of Pioneer 2 also hopes to exploit "the germ", a mysterious substance discovered on the planet, which they use to power the newly developed "C.A.R.D. technology", which is used to store items such as weapons as cards and allow them to be used much more efficiently.[1] C.A.R.D. is an acronym for "compressed alternate reality data". The game can be played as either the "Heroside" or the "Darkside". The "Heroside" are government-appointed officials, who take orders from the government to explore, research, and capture the Arkz, an anti-government faction. The "Darkside" are the Arkz, founded by a man known only as Red. The Arkz try to intercept and destroy the government's plans for the exploitation of the planet. They also oppose the use of C.A.R.D. technology due to its unpredictability and the lack of complete understanding of the germ. They still, however, use a stolen version of the technology in order to be able to compete with Heroside. Both sides also search for the location of the "Great Shadow", which is believed to be the source of the germ.

Within the two factions, each character has their own goals and aspirations, and playing as certain characters in battle will reveal different aspects of the story. When both sides of the story are completed, one after another, it is discovered that the government, while experimenting with the germ for clone technology, is attempting to create bio-soldiers with the genetic material of Red's deceased twin daughters. The final boss for Heroside is a rejected mutated clone of Pollux. The final boss for Darkside is a rejected mutated clone of the other twin, Castor. After completing the storylines and their boss battles, there is a final battle with the source of the germ, Amplam Umbra. Once the source is destroyed, Pioneer 2 finally lands on Ragol, and the colonization of the planet begins.