The story line of PaRappa the Rapper 2 centers on Parappa, a young puppy, and his continuing adventures in overcoming his obstacles through Hip hop music. Parappa has recently won a hundred years supply of noodles and has grown tired of eating them. Parappa's girlfriend, Sunny Funny, offers to make him dinner one evening and he gladly accepts. However, when she serves him noodles, Parappa throws a tantrum, leaving Sunny Funny to call him a baby. To prove to Sunny Funny that he is not immature, Parappa seeks to complete a number of tasks, such as getting a job at a Beard Burger restaurant or working out to Chop Chop Master Onion's romantic fitness television program.

The plot continues to become more bizarre as the story ensues and it is slowly revealed that all of the food in town is being turned into noodles by a military dictator. Parappa and his friends get shrunk by his father's invention, so he helps coach them back to normal size with the help of Guru Ant. Parappa gets drafted into the army and must complete a military boot camp training course with Instructor Moosesha. He becomes an amateur barber after customers are being given afros by a schizophrenic hairstylist caught under a hypnotic tune.

Parappa confronts the inconsiderate Colonel Noodle by beating an 8-bit video game called Food Court, learning the perfect weapon against noodles, sweets. The Colonel turns out to be Beard Burger Master's son, who has become sick of eating burgers. Parappa convinces him that noodles aren't the only food around. The game ends with a final party with returning hip-hop master MC King Kong Mushi, and Parappa learns that Sunny Funny already likes him the way he is. Things go back to normal and Parappa can eat anything...except cheese, of which he's won another 100 years supply.

The game plays similar to its predecessor and features 8 stages. The teacher will give a line of rap and PaRappa will have to repeat it, or otherwise improvise it. If he messes up his line twice in a row, he drops a rank from Good, to Bad, to Awful. Performing well two times in a row will bring the player up a rank. Players lose the level if they drop below Awful, or finish the level in the Bad or Awful state. Parappa 2 handles this a little differently to its predecessors, as upon dropping a rank, the teacher will say 'Getting Worse', and the song will go back two lines, and sometimes altering the lines to make them easier to play. If the player improvises a rap successfully two times in a row, it accesses Cool mode, where the teacher leaves PaRappa to do freestyle by himself. If PaRappa can reach the end of the level in Cool mode, he'll earn a Cool ranking for that stage. This unlocks music tracks available to listen in a music player available at the end of the game.

Between every two levels (except for level 8), there is a minigame in which 'Kotamanegis' (little onions) from Chop Chop Master Onion's dojo hold up plates for PaRappa to break. Hitting the plates earns PaRappa extra points to add to his previous level's score, whilst hitting the Tamanegis when they are not ready deducts points.

When a level is completed, a versus mode is unlocked, playable with a friend or against the computer. In this mode, the two players are given a line to rap, and each player must try and improvise to get a higher score than the previous one. Beating their opponent earns a point, and three points win the game.

Upon completing the game, Parappa's hat changes color, going from Blue, to Pink to Yellow. When playing through the game again, the lines are remixed. Completing the game in Cool Mode unlocks a music player where you can listen to any level with a Cool Rating on, along with the full version of the Stage 8 Intro song "Come a Long Way", while completing the Vs. CPU mode on all difficulty levels unlocks the final song, "Say "I Gotta Believe!"", performed by De La Soul featuring DOUBLE. The player can change his hat color on the title screen by rotating the analogue stick, but the line changes will remain, meaning the player will have to start a new game from scratch in order to play the songs in the original layout.

The Food Court Video Game was featured with Beard Burger Master, Chop Chop Master Onion, Guru Ant, Instructor Moosesha, and Hairdresser Octopus during Food Court. Anyone who can't complete it can eat nothing but noodles.

In the North American version of the game, in order to aviod a T rating, every reference that Guru Ant makes about himself being called "the lord" is changed and replaced with Guru proclaiming himself to be "the man" in both Stage 3 and Stage 6. Also in the North American version, the original line of the Burger store level (Stage 1), "Taste better than wine", was replaced with "You better get in line". And in the Food Court level (Stage 6), the original lyric in the first part, "Cut the lettuce, (THROW) warm the buns", is now "Cut the lettuce, (THROW) toast the buns" in the U.S. version to fit the lyrics of the first stage. These alterations do not appear in either the PAL or Japanese versions.

Unlike the first two games in the PaRappa series, which got generally favorable reviews, PaRappa 2 received generally mixed reviews. Metacritic gave it a 67 out of 100, while GameRankings gave it around 68%. GameSpot's Jeff Gerstmann gave the game a 6.6, stating that "an almost total lack of innovation makes the game seem pretty dated when compared with other games on the market. ... Even when played to perfection, though, the rapping still sounds just as stuttery as it did in the previous game. While it was excusable then and perhaps even a little charming, it would have been nice to see the developers make better use of the PlayStation 2's higher specs." Though the game "features the same 2D graphical style as its predecessor, but it's not without its share of enhancements," he added, "The music in the game covers a lot more ground, genre-wise, than the original did, but none of it is especially funny or toe-tapping--with the exception of the level that takes place inside an old video game machine. PaRappa 2 isn't a bad game, but it doesn't have as much of the same off-beat charm that the original--and to a lesser extent, Um Jammer Lammy--had." However, IGN's Doug Perry gave the game a slightly better score of 7, saying, "The game concept hasn't changed, leaning neither toward an evolutionary or even a moderate change in the way gamers play music games. ... [PaRappa 2 is] not as hard as Um Jammer Lammy (which may be good for some folks), and it certainly covers familiar territory when it comes to the essentials -- gameplay, graphics, and sound -- but it's still fun and happy-making."