Gameplay is similar to the original Phantasy Star, the first game in the series. Its battle system is turn-based, allowing the player to choose commands for their party of up to four characters. Each of the eight characters has a different set of preferred weapons and armor, as well as techniques, suited to the character's job. The player must defeat enemies in the overworld and in dungeons to advance in the game.
The game abandoned the first-person view that the first game used for dungeons and battles. Phantasy Star II instead uses a top-down perspective for exploration and a third-person view in battles.
Somewhere deep within the Andromeda Galaxy lies the Algol Star System. The parent star, Algol (referred to as "Algo" by this point in the timeline), has three planets orbiting about it. First is Palm ("Palma"), the home of the government. Governors, treasurers, and great thinkers dwell here in great ivory towers, away from the hubbub of everyday life. Next is Mota ("Motavia"), the shining jewel. Once a dry desert planet infested with ant lions, Mota has been transformed into a blue and green tropical paradise. Domed farms grow crops, and the water is regulated into dammed rivers. Life on Mota is sweet, peaceful, and easy. The people have everything they want and do not need to work. Farthest out is Dezo ("Dezoris"), the ice planet. Little is known about this mysterious and dark planet.
One thousand years have passed since Alis and her friends liberated Algo from the evil Lassic. Algo has since prospered under the care of a giant computer called the Mother Brain. The Mother Brain regulates the climatrol tower, the bio-systems lab, and all other things that provide whatever the people in Mota need.
The game begins with the character Rolf recalling a strange recurring nightmare he has been having. In the dream, a young girl who Rolf does not recognize (but who resembles Alis) is battling a demon. Finally, just before the demon would kill her, Rolf awakens. From his home in Paseo, Mota's capital, Rolf goes to the central tower to meet with the commander, the head of government on Mota, in order to receive his newest mission.
The first threat is an increase in dangerous biomonsters (biologically altered animals). Rolf sets off with his companion Nei, a humanoid with cat-like features, to investigate, accompanied by six others with each different, but same purpose. Along the way, the group discovers a human-biomonster hybrid named Neifirst, who reveals that Nei's origins are the same as her own. Being part biomonster, she is an outcast from society, causing her to loathe mankind and, because of this, sabotage both Mota's climate control system and the biosystems laboratory. Nei confronts Neifirst and battles her in a one-on-one fight, but is defeated and killed. Anguished, Rolf and the remaining party defeat Neifirst, bringing an end to Mota's Biomonster hazard.
However, this sets another incident in motion: the exploding impact causes the central lake, the residential reservoir of Mota, to overflow with water. To prevent a massive flood, Rolf and his friends decide to open up the surrounding four dams. After unlocking the last one, they are captured by Mother Brain's security robots and sentenced to death upon the Gaira satellite. However, the satellite malfunctions and collides with Palm, destroying both. Rolf and company are rescued in the nick of time by a space pirate, Tyler.
The group boards Mota's last plane to Dezo. Located at a far corner of the planet is the Esper Mansion. Upon reaching there, Rolf awakens the legendary Lutz from a long sleep. Lutz reveals the secrets of Rolf's past, as well as the dark secret of Mother Brain which relates to the fate and destruction Algo is now facing. In order to save the system, the heroes seek to recover the powerful Nei arsenal, found in four hidden dungeons, capable against the enemies on the spaceship Noah, where Mother Brain resides.
It is eventually revealed that Dark Force has been behind every threat Rolf has faced, including Mother Brain itself. Rolf confronts the two evil entities and defeats them. After the final battle, Lutz alerts him that there are still people on the ship: the remaining survivors from Earth. They reveal they created Mother Brain to satisfy their greedy lifestyle at the expense of Algo's resources, and a fight between the heroes and the earthmen ensues. The game ends there on an open-ended note, with the outcome of the fight left unrevealed.
