Episode II pretty much killed the franchise, most people were surprised that Namco green lighted Episode III after how poorly Ep II did. It wasn't helped that between the end of Episode 1 and getting into Episode III, Monolith Soft suffered some bad strife with the publisher and lots of mismanagement had several key members leave including Yasunori Mitsuda and Soraya Saga. Saga is notable because she left because of what Namco did to Episode 2 because most of Episode 3 was suppose to be in Episode 2 as well but got removed because the higher ups wanted to milk the series for longer.

The main issue with Episode 2 is that it was suppose to be part of Episode 1 but got cut due to time constraints and other executive meddling. If you watch the first major trailer for Episode 1 back in 2001, you'll notice some scenes from Episode 2 are in it using the Eps 1 engine, not to mention a few scenes that didn't make it into either game.



It should be noted that when Xenosaga was originally started, Tetsuya Takahashi and Monolith Soft were going to release the series much like Xenogears (Episode 5) was suspected to be release had Square green lighted the series, and have each numbered title set in its own part of the timeline, with its own unique casts with only KOS-MOS, chaos, and the Zohar being the connecting element between the stories. So Episode 1 was originally meant to be the what became the actual three episodes released. It was suppose to be Shion's complete story and then jump to a new time period afterwards. That of course didn't happen, partially because the project was probably more ambitious than anyone thought it would be, and partially because the economics of the game industry came into play.

The other issue with 2, as NeoCracker sort of mentioned was that it did very little to really move the plot. Episode 2 is largely a side story about Jr. and very little else happens, with characters like chaos and KOS-MOS getting little to know character development. Also, the development team ended up retconning a lot of Episode 2 when they made the DS game Xenosaga 1 & 2. The stories of Ep 2 in both are largely different outside of the stuff about the U.R.T.V.s and characters like Voyager and the Red Testament got a bit more screentime in the DS version. Episode 3 is actually based off the timeline established in the DS version, not the actual PS2 release.

Ep. 2 is a such a mess, even Monolith Soft wants to forget about it. I'm also happy to see that my years spent on a Xeno-forum have actually come into use.