It is Christmas of 1925, three months after Alone in the Dark. "Supernatural Private Eye" Edward Carnby and his partner Ted Stryker are investigating the kidnapping of young Grace Saunders. The trail of clues leads to an old mansion named "Hell's Kitchen" - the home of an infamous gangster boss and his gang. Edward decides to pick up the trail when he learns of Ted's disappearance in the mansion. Unfortunately, Edward soon finds out that Ted has been murdered.

The original game's horror theme has been significantly de-emphasized in the sequel. While there are some supernatural goings-on (Voodoo black magic), the main villains are gangsters and pirates. While the enemies are revealed to be possessed by evil spirits, and are green and zombie-like in appearance, they are far from the shambling walking corpses of the first game, and walk, talk, and behave much like ordinary people, arming themselves with Tommy Guns and shouting at the player. The game world is larger than that of the original, encompassing not only the mansion, but also the surrounding gardens as well as a pirate ship hidden in caverns beneath the house.