Tex Murphy is hired by business mogul Marshall Alexander, founder of TerraForm Corporation, to locate his missing daughter, Alexis. As in the first game, Tex travels between destinations and interrogates characters associated with the subject such as Alexander's attorney, his wife, and Alexis's roommate and business partners. Interrogations are menu-based and dialogues open up additional destinations and dialogue options. The investigation will reveal to Tex that the girl's disappearance is linked with an item in Alexander's possession.

The player plays the role of Tex Murphy, a down-and-out private investigator living in post-apocalyptic San Francisco. Tex is hired by a beautiful young woman named Sylvia Linsky to investigate the death of her father, Dr. Carl Linsky, a professor at the University of San Francisco. Prior to his death, Carl would not talk to his daughter about the secret project he was working on, and days later, he was seen falling off the Golden Gate Bridge. Sylvia suspects murder, but the police say it was routine suicide. To help get him started, Tex is given $10,000 and a few leads. The player is referred to the game's manual for a list of their leads.

Since the game is told as a series of flashbacks, it actually takes place in two different time frames. The current year is 2043, shortly after the events of The Pandora Directive and as such tensions between the Mutants and Norms have begun to die down. However, the flashbacks take place in November 2037. The Crusade for Genetic Purity is beginning to gain momentum, and tensions are building between the two groups. The Mutants are usually forced to live in the run-down areas of cities such as Old San Francisco. Tex lives in his new apartment on Front St. in New San Francisco. He has just been kicked out of the Colonel's Detective Agency for reporting the Colonel's unethical practices, and has now gone into business on his own.

Like all Tex Murphy games, The Pandora Directive takes place in post-World War III San Francisco in April 2043. After the devastating events of WWIII, many major cities have been rebuilt (as is the case with New San Francisco), though certain areas still remain as they were before the war (as in Old San Francisco). WWIII also left another mark on the world: the formation of two classes of citizens. Specifically, the Mutants and the Norms. After the events of Under a Killing Moon, tensions between the two groups have begun to diminish. The end to the Crusade for Genetic Purity was a turning point in the relations between Mutants and "Norms". Tex still lives on Chandler Ave., which recently underwent a city-funded cleanup. The events of WWIII still left the planet with no ozone layer, and to protect their citizens many countries adopted a time reversal. Instead of sleeping at night, and being awake in the day, humans have become nocturnal, in a manner of speaking. Though Tex lives in what is considered a Mutant area of town, he himself is a "Norm".

Under a Killing Moon dramatically shifted the gameplay of its predecessors in the series by fully utilizing interactive 3D environments. The player controls the protagonist Tex from a first person perspective. The virtual world allows full freedom of movement, and as such allows the player to look for clues in every nook and cranny. It was also the first Tex Murphy game to stray from the traditional adventure game dialogue format of providing options that showed exactly what the player's character would say. Instead, descriptions of the dialogue choices were given, providing some mystery to what Tex would say.