Dino Crisis 3 entered production in mid-2000, in a production led by Hiroyuki Kobayashi, with Shinji Mikami as Executive Producer. The original proposal was for a "human drama" set mostly within an unspecified "facility" in a city under siege from rampaging time-displaced dinosaurs, with the player being able to fight the dinosaurs with AI partners, and in which decisions made by the player could change the course of the story. The September 11 terrorist attacks convinced Capcom Production Studio 4 to move away from the city environment, and it was instead decided the game would be set on-board a space ship far into the future. Dino Crisis 3 was always intended as an Xbox-exclusive title when that console was judged to be better at rendering graphics than the PlayStation 2. Hiroyuki Kobayashi considered a PlayStation port of the game to be "impossible".
The game's HUD went through considerable development in 2002. Originally the HUD was to be positioned on the bottom-left corner of the screen, and show health and jetpack fuel stats as lines, as well as the number of WASPs available to the player. The weapons system itself was different from earlier games; players would rely on a main weapon with infinite ammunition, with the option to switch to other forms of ammunition for stronger opponents which would be limited and have to be found or bought. The WASPs were designed as a secondary weapon which would fly around the map and provide additional aid to the player during combat.
Like in Dino Crisis 2, more focus is given to giving players the fun of shooting dinosaurs than item conservation and avoiding them like in Dino Crisis. A shop feature was created for the game where, like in Dino Crisis 2 the player could purchase supplies based on points accumulated from killing dinosaurs. However, in this game the player could could accumulate a finite number, requiring them to return to the shop frequently or they would receive no further points.
In developing the camera, the team decided to take full advantage of the Xbox's power and make it 3D rather than using 2D pre-rendered backgrounds like Dino Crisis 2 had done. In a similar manner to Studio 1's contemporaneous Resident Evil Outbreak, rooms were divided into zones where a camera would follow the player, then cut to another camera when they leave the area.
Having decided to go with a futuristic space setting,Ozymandias was designed to heavily use shiny, metallic walls. The basic ship design was agreed early on as well as the modules which could be transformed.
The creatures that populate the Ozymandias are revealed in the story to be genetically-engineered human-primate hybrids. As such the creature designers were free to create the creatures how they wanted; this was liberating for the designers, as the Dino Crisis and Dino Crisis 2 teams had problems with making the Therapods unique. A common theme in the dinosaurs was that they would have exposed skin and could release electricity as a form of attack.
An early story proposal centred on the emergence of dinosaurs in the present day world, possibly the very time distortion Dino Crisis 2 alluded to with the Noah's Ark Plan. A single image hinting to this storyline was shown by Yoshiki Okamoto when he announced three Capcom games at the May 16 Xbox announcement for E3 2001. After the September 11 attacks, Kobayashi moved the project away from the city proposal and to something else. With offers from the Flagship team, led by Noboru Sugimura; Hiromichi Nakamoto; Shin Yoshida and Hiroaki Kanazawa, it was agreed the game story be shifted to a futuristic environment in space which would allow for new ideas.
Some fifty minutes of pre-rendered cutscenes were created for the game, and a professional film director was hired to direct the work so that elements such as camera angles would look movie-like.