Both this film and A Return to Salem's Lot (1987) were intended to be released direct to home video, but they were given a limited theatrical release first.
Larry Cohen later said that this film began when he went to Warner Bros with André De Toth and pitched them the idea of remaking House of Wax (1953). Warner was not interested, but the studio wanted Cohen to make a film for their video division. Cohen was only willing to do this if Warner would pay for two films to be shot back-to-back. Warner agreed. The two films were sequels to It's Alive (1974), and Salem's Lot (1979); both had built-in name recognition ideal for the direct-to-video market. It was Cohen's third and last It's Alive film. "I thought if I was going to make a third movie, I had to follow this story through to some kind of new and satisfying resolution. So, I asked myself some questions: what are these babies like as adults? What is the monster going to look like when it physically develops and ages? I thought those were important questions to answer and deal with. Otherwise, there was no point in making the movie if I was just going to have a load of monster babies running around again, killing people. The second film was, to a degree, different from the first because the protagonists were trying to save the monsters. In the third film, we got all of the monster birth stuff out of the way in the prologue and gave the audience their horror. The rest of the movie was more of an exploration of Jarvis' character and the progress of the monster children. I thought that differentiation from the events of the previous pictures made Island of the Alive a worthwhile project".
The film's opening cab sequence was used in Clint Eastwood's fifth and last Dirty Harry film, The Dead Pool (1988), as footage from a murdered director's filmography to show the kind of films that he was making. "More people probably saw this sequence as part of Dirty Harry than saw it as part of It's Alive III."
The woman asking for Stephen Jarvis' autograph in the film is played by Elizabeth Sanders, second wife to Bob Kane, the creator of Batman.
The scene in the film where Sally sleeps with Stephen Jarvis and then discovers that he fathered one of the monster babies made some people think that it was a reference to HIV. "It was fully intended." Larry Cohen thought that horror films are ideal for adding serious commentary while still maintaining the entertainment value.