16-year-old Katie Embry (Amber Tamblyn) and 17-year-old Becca Kotler (Rachael Bella) discuss a supposedly cursed videotape while home alone at Katie's house. According to legend, those who watch the tape will die in seven days. Katie reveals that, seven days before, she went to a cabin at Shelter Mountain Inn with friends, where she viewed the video tape. The girls laugh it off, but after a series of strange occurrences in the next few minutes, involving a television in the house turning itself on, Katie dies mysteriously and horrifically while Becca watches, leading to Becca's institutionalization in a mental hospital.
Katie's 8-year-old cousin, Aidan (David Dorfman), is visibly affected by the death. After Katie's funeral, Ruth Embry (Lindsay Frost) asks her sister Rachel (Naomi Watts), Aidan's mother and a journalist, to investigate Katie's death, which leads her to the cabin where Katie watched the tape. Rachel finds and watches the tape; the phone rings, and she hears a child's voice say "seven days", upsetting Rachel. The next day, Rachel calls Noah (Martin Henderson), her ex-boyfriend, who is also Aidan's father, to show him the video and asks for his assistance based upon his media-related skills. He asks her to make a copy for further investigation, which she does, but later takes it home herself. To Rachel's horror, she discovers Aidan watching the copy a few days later.
After viewing the tape, Rachel begins experiencing nightmares, nose bleeds, and surreal situations (for instance, when she pauses a section of the tape in which a fly runs across the screen, she is able to pluck the fly from the monitor). Increasingly anxious about getting to the origin of the tape, Rachel investigates images of a woman seen in the tape. Using a video lab, she discovers images in the tape's overscan area, which through further research she discovers to be a lighthouse located on Moesko Island. It also turns out that the tape's overscan does not include time code, which hints that the tape was not made using electronic equipment. The woman turns out to be Anna Morgan (Shannon Cochran), who lived on the island in Washington, many years prior with her husband Richard (Brian Cox). Rachel discovers that, after bringing home an adopted daughter, tragedy befell the Morgan ranch – the horses raised on the ranch went mad and killed themselves, which in turn supposedly had caused Anna (who loved her horses) to become depressed and commit suicide. Rachel goes to the Morgan house and finds Richard, who refuses to talk about the video or his daughter and sends Rachel away. A local doctor tells Rachel that Anna could not carry a baby to term and adopted a child named Samara (Daveigh Chase). Dr. Grasnik (Jane Alexander) recounts that Anna soon complained about gruesome visions that only happened when Samara was around, so both were sent to a mental institution. While Rachel is investigating on Moesko Island, Noah is investigating the institution, where he finds Anna's file and discovers that there was a video of Samara, but the video is missing. Back at the ranch, Rachel sneaks back to the Morgan house where she discovers the missing video, watches it, and is confronted by Richard who says that the girl was evil. He then electrocutes himself in the bathtub, sending Rachel running out of the room screaming.
Noah arrives and, with Rachel, goes to the barn to discover an attic where Samara was kept by her father. Behind the wallpaper they discover an image of a tree seen on the tape, which grows near the Shelter Mountain Inn. At the inn, they discover a well underneath the floor, in which Rachel finds Samara's body, experiencing a vision of how her mother pushed her into it. Rachel notifies the authorities, and gives Samara a proper burial.
Rachel informs Aidan that they will no longer be troubled by Samara. However, Aidan is horrified, telling his mother she had freed her body, and that Samara "never sleeps". and that she was not supposed to help Samara. In his apartment, Noah's TV turns on, revealing an image in which a decaying Samara crawls from the well and out of the TV into the room. Horrified, Noah trips backward and tries to crawl away from Samara. Samara faces him, exposes her true face and stares directly at him, killing him with fear, which Rachel discovers after racing to his apartment and seeing his face distorted like Katie's was. Upon returning to her apartment, Rachel destroys and burns the original tape. Wondering why she had not died like the others, she remembers that she made a copy of the tape. She soon notices the copy of the tape underneath the couch. Rachel realizes the only way to escape and save Aidan is to have him copy the tape and show it to someone else, continuing the cycle. Rachel helps Aidan copy the tape, who asks her what is going to happen to the person they give the tape to. She does not respond as a shot of the well is shown in the tape. Then the screen goes to black static and ends with a few pictures from the tape.
Approximately six months after the events of the first movie, Rachel Keller (Naomi Watts) and her son Aidan (David Dorfman) have moved from Seattle to the quiet coastal community of Astoria, Oregon. Rachel begins a new job at the Daily Astorian, a local newspaper, working for Max Rourke (Simon Baker). Before long, there is news of a teenage homicide in town. Rachel investigates, finding the dead boy's face shows a deformed expression of horror just like the previous victims of Samara Morgan's cursed tape. Upon finding the boy's corpse, she also has a vision of Samara grabbing her and declaring "I found you." After that she goes to the police station in order to talk to the girl who witnessed the boy's death and after persuading the girl to tell her she finds out where the tape is. She takes the tape deep into the woods and burns it.
Aidan has a dream in which he comes down to the T.V. room without Rachel home, and is pulled into the screen by Samara when the videotape starts. Back at home, Aidan starts to develop hypothermia, and his body is suddenly covered with bruises. At a county fair, Aidan takes pictures of himself in the bathroom mirror, with a blurred Samara standing behind him. His behavior grows increasingly odd and distant, and whilst driving back from the fair, the car carrying Aidan and Rachel is repeatedly attacked by a deer, nearly killing them. This event was apparently mysteriously foreseen by Aidan, who warned Rachel of impending danger seconds before the deer came out of nowhere. Strange occurrences within their house (including visions of Samara, a burn mark in the wall which resembles the tree from the cursed video, and seeming poltergeist activity) frighten Rachel, leading her and Aidan to flee. Rachel subsequently asks Max if he can take care of the increasingly sick Aidan at his house.
Max says that Aidan's condition merits a trip to the hospital, but Rachel, knowing that his illness is unnatural, is adamant that traditional doctors cannot help him. When Rachel attempts to give Aidan (who suddenly develops a mysterious fear of water) a warm bath at Max's, a series of paranormal events leads to Rachel seeing Aidan's body replaced by Samara. Max walks in when she attempts to drown Samara, and sees her trying to drown Aidan instead. Suspicious, he insists on taking Aidan to the hospital against her wishes, stating, "You wanted my help, now you're getting it."
Based on the bruises on Aidan's body, the hospital staff, particularly psychiatrist Dr. Emma Temple (Elizabeth Perkins), suspect child abuse on Rachel's part, because Rachel reveals she suffered from postpartum depression, and won't allow her to be near her son. Desperate for answers, Rachel flees the hospital and travels to Seattle to dig deeper into Samara's past. Knowing that Samara was not Richard and Anna Morgan's biological child, she tracks down Samara's birth mother, Evelyn (Sissy Spacek), who tried to drown Samara as an infant and has been living in a mental institution ever since. Meanwhile, Samara (in Aidan's body) inflicts a psychic assault on Dr. Temple, forcing Dr. Temple to commit suicide so that Samara (in Aidan's body) can escape the hospital.
Evelyn advises Rachel to "listen to her baby" when she seeks advice on how to deal with Samara. Max goes to Rachel's house to check on her, only to find Aidan watching TV alone. He attempts to surreptitiously capture Aidan on film in order to reveal Samara, as Aidan had before Samara possessed him. Aidan/Samara notices the camera. When Rachel returns home, she finds Max's car parked outside and his dead body inside with the same warped expression of Samara's other victims. Disturbed and unsure of what to do, Rachel then goes inside to face her possessed son.
Rachel tells Aidan/Samara that he should go to sleep. Aidan responds that he never sleeps. She suggests she make him something to eat. Rachel goes into the kitchen, preparing two peanut butter and jelly sandwiches. On one sandwich, she puts sleeping medication, intended to make Aidan unconscious. After eating the sandwich, Aidan soon falls asleep.
Rachel fills the upstairs bathtub with water and holds an unconscious Aidan underwater. Samara's spirit leaves his body, and Rachel is then able to revive him. However, Samara attempts to come back into the house through the TV set. Rachel grabs onto Samara as she is emerging, and is pulled into Samara's well inside the world of the cursed video. Looking up, Rachel realizes that the well lid is always left open. Rachel begins climbing the side of the well. Halfway up, Samara emerges from the water below and also ascends in a very inhuman fashion. As Rachel is climbing out of the well, Samara grabs her leg. Rachel manages to shake her off and then causes a jet of water to come out of the side of the well. Samara loses her grip and falls back down the well, however, she begins climbing again at a rapid rate. Rachel climbs out of the well just as Samara cries '"Mommy!"' in a deep voice. Rachel responds angrily that she's not her mother and pushes the lid shut just as Samara is about to escape, trapping her in the well.
As Rachel wanders the monochromatic world of the cursed tape, she hears Aidan's voice and walks toward it, only to come to the cliff where Anna Morgan jumped to her death. She hears Aidan calling her name below. Determined to follow Aidan's voice, Rachel jumps off the cliff and ends up back in her living room with Aidan, where they embrace. Aidan calls Rachel '"Mommy"', and she asks him to just call her Rachel. The film ends when the camera then views the street and the sky, where a crescent moon can still be seen. The film then flickers out.