It is one year after the events of Episode II and Shion Uzuki has left Vector Industries. After the "Missing Year" fiasco, in which she uncovered information that revealed her former employer's shadowy intentions and her father's involvement with the U-TIC organization, Shion joined the anti-Vector group, Scientia. The CEO of Vector Industries, Wilhelm, is trying to "reset" the universe, going back to the point in time where it all began. Apparently, he has been doing this for millennia, in order to keep the universe from collapsing. While separated from her comrades from previous Xenosaga games, save Canaan and Miyuki, Shion is inexorably drawn back into their intertwined fates when she is contacted by Allen Ridgely. Shion travels to Fifth Jerusalem, where the previous Xenosaga crew is reunited. At the CAT Facility, a mysterious new researcher, Roth Mantel, has unveiled a next-generation model of android named T-elos, who bears a startling resemblance to KOS-MOS. After a series of experimental demonstrations, overseen by such VIPs as Juli Mizrahi, Mantel informs the Vector staff that the KOS-MOS project is being scrapped. Jr. and the others stage an infiltration into the CAT Facility and recover KOS-MOS before rendezvousing with the Durandal.
In September 2005, it was officially announced that Episode III would mark the premature end to the series, which was originally planned to span six titles. The cast from Episode I and II will return; minor protagonists Allen Ridgeley, Canaan and Miyuki Itsumi are playable characters for the first time in the series, albeit only briefly. The keyword database, is still present just like Episode I and Episode II, it also has enhanced features like images and the ability to view in-game models of characters, enemies and mecha. The database has a new feature called "Memory Code" in which any cut scene can be viewed, provided it has already occurred during gameplay in an existing save file. Episode III takes place one year after Episode II, with E.S. units from Episode II and the Zohar Emulators and "techs" from Episode I making a return.
The North American release of the game was briefly censored, the majority of these edits were for scenes of violence and blood that would have elevated the game beyond the "Teen" rating given by the ESRB to the "Mature" level. The storyline however, remains identical in both the original Japanese release and the North American versions.
For example, a noticeable instance of the editing of a scene is when a child reacts to the death of another character by "putting (the blood) back" in the dying individual. In the North American version, the child has nothing in her hands, even though she says and acts like she does.
At the start of Episode III's development, Yuki Kajiura (Xenosaga Episode II, .hack//SIGN, Noir, and Madlax) became the sole composer in Xenosaga III. A handful of remixes, arrangements and reappearances of tracks from the "Xenosaga Episode II: Movie Scene Soundtrack" appear in the game. The game soundtrack, "Xenosaga Episode III: Original Sound Best Tracks (Yuki Kajiura selection)" was announced for a 2CD release on July 12. It consists of 40 tracks selected by Yuki Kajiura from the game (though it is not a complete release of all the tracks). The ending theme of the game is called "Maybe Tomorrow", sung by Emily Curtis. The soundtrack also contains vocals by Eri Itoh. The soundtrack follows the style of Kajiura's Episode II soundtrack with several key themes from Episode II, chief among them KOS-MOS' theme, appearing throughout the game.
In Japan, anyone who preordered the game received a special DVD with the name Xenosaga Alle spezielle DVD. It contains a collection of trailers, concept art sketches and merchandise images from all Episodes as well from side projects such as Xenosaga FREAKS. There were three different North American preorder bonuses available at different stores: an exclusive art book (GameStop, EB Games), a life-size poster of T-elos (Game Crazy) and a limited edition version of the game with special box art (Best Buy).
Episode III received generally good reviews, and the majority of media and fan outlets felt that the game improved upon Episode II, which many considered a disappointing sequel to the first installment. Specifically, many felt that the new battle system, although typical RPG fare, was an improvement over the complicated "zone break" system used in Episode II, and that the voice acting was much improved with the return of several popular voice actors which were inexplicably recast for Episode II (notably Lia Sargent as Shion and Bridget Hoffman as KOS-MOS).
According to Bandai-Namco's 3rd Quarter 2006 results, Episode III sold 343,000 copies in Japan, North America and Asia.