As indicated by the game's name, it takes place two years after the last canon King of Fighters game, The King of Fighters 2001. According to the game's storyline, a new King of Fighters tournament is organized by an unknown host. The several new rules are instituted, including a whole new team system.
At the end of the tournament, depending on how players defeat the midgame boss, Kusanagi, the players will either face Adelheid Bernstein or learn that the tournament organizer is Chizuru Kagura and that a group known as "His Distant Land" is working in a secretive plot. After defeating the mysterious stone fighter known as Mukai, Ash Crimson appears before Chizuru, attacks her in her weakened state and steals her powers. Kyo Kusanagi and Iori Yagami come to Chizuru's aid as Ash tells Iori that he's his next target.