After the events in the first game, paranormal investigator Delaware St. John
is pondering where his visions come from and if everything happens for a
reason. While he is helping Kelly Bradford at her book store, a book falls to
his feet and he is drawn to it. While browsing the atlas, lines appear on a
map, forming the outlines of a town not on any map. Just like the previous
game, Delaware St. John will explore while Kelly assists him through VIC, the
Voice/Imagery Communicator. Shown in the bottom right part of the interface,
it can be used to ask for clues, or to send photos or recordings of paranormal
activity for analysis. Many of the puzzles involve helping ghosts find peace
by returning objects. The game also introduces the character Simon Foss, who
returns in the third game. Delaware does not meet any human characters in the
game, only ghosts.

As in all games in the series, the story has been split up into two parts: The
Big Story (in a movie theatre) and House of the Damned (in an orphanage).
After completing the first story, the second one becomes available. The game
is shown from a first-person perspective, with pre-rendered 3D cut-scenes in a
third-person view. Puzzles consists of inventory-based actions, exploration,
gathering clues, some more difficult puzzles involving codes, and a few time-
based actions where John needs to act quickly so as not to die. Compared to
the first game, the environment is now a bit larger with more areas to
explore. Usually, there are no dialogue options while the story is told, but
this game is the only one in the series to feature a few dialogue trees with
different questions, but with no effect on the story.

The game usually has Delaware solve tragic events by talking to ghosts and
helping them find peace. The events in the town are related to his own past,
however, and the overall storyline about the legend of The Destroyer and The
Protector is continued.