Most of the movie takes place 2 months before the first one, with Micah Sloat and Katie Featherston reprising their roles. It takes place in Katie's sister's house, with her husband and step-daughter, and their new baby, Hunter.
When they come home one day a few months after bringing Hunter home, the entire house is torn up, but nothing seems to be missing. They install security cameras to keep watch on the house, and most of the movie takes place through security footage.
As with the first Paranormal Activity, small things start happening: Doors moving, a mobile spinning, and so on. Nothing really happens for the first 12 nights.
One day when Katie's sister is sitting in the kitchen, all the cabinets explode open and scare her while she's reading a magazine. They drag her down the stairs again a la Paranormal Activity One style, and it's revealed that someone in the long line of family made a pact with the devil, and repayment was to be the first born son. But the family hadn't had a boy since 1930, so Hunter is the first, and the demon is coming to get him.
The family decides to exorcise the demon INTO Katie, without Katie's knowledge. Then all of the events from PA1 take place, and it ends with Katie getting into her sister's house, snapping her husband's neck, throwing her sister around like a rag-doll, killing her, and then walking off with the baby.