Hyeong-Jin Kim, the Production team head for Lineage II, came up with basic concept for the game in early 2000, and development began in October to November of the same year.Kim and producer James Bae have stated that their reasons for developing a prequel for Lineage rather than a sequel is that "Lineage will continue to be updated as a game", and that "by working on its past, we will not be risking conflict with the direction of updates that Lineage will take in the future."

A screenshot showing a female elf moonlight sentinel standing in the Elven Village.According to Kim and Bae, the game's initial subtitle, "The Chaotic Chronicle", was developed with the intention to "express the large-scale war, strategies, conflicts, and collaborations that we hope to encourage among players."

Lead Game Designer Raoul Kim said that the reason for rendering Lineage II in 3D was "simply because most games today are [also] using 3D graphics", and because they deemed it "more appropriate than 2D for the things that we were going to create." Developers chose to utilize the Unreal Engine 2 game engine because of its capacity to render outdoor scenes and its powerful editing features.

According to Game Design team head, Cheol-Woong Hwang, there were different concepts for each of the race's home villages. He described the concept for the human village in Talking Island as "ordinary", while the Elven Village was designed "so as not to lose the natural and royal high-class feeling." They designed the Dark Elven village based on a "grotesque and serious feeling in order to express the rough history of these who had been expelled from the Elves."