Raz, fleeing from the circus, tries to sneak into Whispering Rock but is caught by the Psychonauts agents. Though they contact his parents so that they may recover Raz, they allow Raz to stay at camp though not allowing him to participate in the camp activities.[2] However, they recognize that Raz has strong psychic abilities.

After Coach Oleander allows Raz to participate in "Basic Braining", Sasha, impressed by his performance, invites Raz to test how strong his abilities are.[3] While exploring his own mind, Raz comes across a vision of Dr. Loboto attempting to pull Dogen's brain from his head, claiming it to be a "bad tooth", but Raz is unable to overcome a mental barrier to see more.[4] When Raz returns to the real world, he finds that Dogen's brain has gone missing;[5] the Agents pass it off as part of Dogen's personality. Raz is able to overcome the mental barrier in his mind to learn that Dr. Loboto is working with Coach Oleander to extract the brains of the children and put them in psychic death tanks. Raz learns that Sasha and Milla have gone away from camp on official business, Coach Oleander is nowhere to be found, and learns that Lili has been chosen as the next victim, taken to the insane asylum for the process. Raz consults with Ford, who is unable to leave the camp but gives Raz a piece of bacon which he can use to contact Ford at any time.

Raz crosses the lake, and encounters the few remaining residents of the insane asylum. After Raz helps to resolve their mental issues, the residents help Raz to reach Dr. Loboto's laboratory at the top of the asylum. He finds that Oleander and Doctor Loboto have taken Lili, Sasha, and Milla hostage. Raz is able to free them, where they turn to fight Oleander and Loboto. As they fight, the insane asylum is burned down, and while the others escape safely, Oleander transfers his mind to one of the death tanks and attacks Raz. Raz defeats the tank, but upon his success, super sneezing powder is ejected from the tank, a last resort of Oleander's. The powder causes Raz to sneeze his brain out. Raz, without much choice, moves his brain into the tank, where his psyche merges with Oleander's.

Raz finds himself in a mental world ("The Meat Circus") that combines his own fears of the circus with Oleander's childhood fears of his father, a butcher. Raz escorts "Little Oly", the child version of Oleander, safely through the world, and is able to defeat the gruesome visions of both of their fathers successfully. However, as their minds are still melded together, the two visions combine into an overall amalgam of the two that Raz is unable to defeat. Suddenly, Raz's real father shows up in the mental world, and explains to Raz that he too had psychic abilities, and did not mean to dissuade Raz from exploring them further. Together, the two are able to defeat the amalgam, and pull Raz' and Oleander's brains apart, restoring them to their proper bodies. As the rest of the children's brains are restored, Raz is congratulated for his outstanding work, and is allowed to become a Psychonaut by both the agents and his father. As he is leaving camp, news arrives that the Grand Head of the Psychonauts has been kidnapped. Raz and his fellow Psychonauts fly off to rescue him.

System requirements:
2.0 GHz processor,
1 GB RAM,
512 MB video card