Terminator 2: Judgment Day is based on the film of the same name, in which two Terminator machine models, the T-800 and the T-1000, are sent back from the future. The T-800 is tasked with protecting a boy named John Connor, who will eventually become the leader of the human resistance in a war against machines. The T-1000 has been sent back with an order to kill young John, ensuring the rise of the machines. In the game, the player largely takes the role of the T-800. John's mother, Sarah Connor, is also playable in certain levels.

The levels are based on prominent scenes from the film, including one in which the T-1000 drives a truck through a flood control channel, in pursuit of the T-800 and John, who are riding on a motorcycle. Other scenes recreated in the game include Sarah's escape from a mental hospital, a sabotage of Cyberdyne Systems' headquarters, and a showdown between the Terminators in a steel mill. Digitized images from the film appear in between levels to advance the story.

Each level features one of several gameplay styles, such as beat 'em up fighting between the two Terminators, or vertically scrolling driving sequences in which characters flee from the T-1000. Sarah's hospital escape is played as a side-scrolling level. Other levels are played as a sliding puzzle game in which the player must perform repairs on the T-800; successfully completing these levels will increase the player's health for the next level, but winning the puzzle game is not necessary to progress forward.