In this episode, Alan finds himself inside Cauldron Lake Lodge talking to Dr Emil Hartman who has taken Alan in and tells the writer he is going mad. Hartman tells Wake that Alice really did drown in the lake, and Alan has been making things up in order to not have to cope with grief. Hartman gives Alan a tour of the Lodge, but leaves shortly to check if the Lodge is ready for what looks like an upcoming storm. In a rec room, he finds the Anderson brothers, they talk to Alan and tell him that this is not a dream and it is all still very real. Who is telling the truth is not told, leaving the player to interpret who is telling the truth, and if the following events are really just Wake hallucinating. Nothing in Alan Wake is explained, just left up to interpretation.
The Andersons tell the writer to head to their farm near Cauldron Lake. Why he needs to do this, they cannot remember because of medication and dementia. Alan leaves the two and ponders over what he has been told. After looking around the lodge, Alan is told by a nurse to head back to his room and try writing. Alan does so, but after spending hours before a typewriter in his room, he is still unable to write a thing. But as Alan is in his room, he suddenly hears a ruckus and shouting from the downstairs in the Lodge. When he heads down, he sees a nurse knocked out cold on the ground and the Anderson Brothers challenging a male nurse to a fight with a hammer. The Andersons tell Alan that "The stage is yours. Seize your destiny!". Alan does this, and runs to Hartman's office to get some answers while everyone else is distracted.
On the way to Hartman's office, the writer is surprised to find Barry Wheeler locked in a closet. Barry tells Alan that he came to the Lodge to take Alan away, but Hartman's goons assaulted him and locked him up. Luckily though, Barry was able to protect Wake's cardboard cut-out from them. Alan then breaks into Hartman's office with Barry, where he finds stolen manuscript pages and a revolver, which Alan takes. But just as he begins to read the pages, Hartman enters the room and tries telling Wake he is slipping back into insanity, but when Alan trains the revolver on him, Hartman gives up. The doctor tells Alan that they should "work together on this, together we can create something wonderful!" Alan, however, doesn't listen and tells Barry to get the car ready, they are leaving the Lodge. But just as Barry leaves, the Dark Presence asserts itself inside Hartman's office, and Alan runs from the room but locks Hartman inside. All Alan hears is a short scream from Hartman, and then silence. Alan then flees from the Lodge as the Darkness begins to tear apart the place and possess the objects and patients.
When Alan finally escapes the Lodge, he is forced to tangle with Taken and Poltergeists inside a hedge maze to get to Barry. Alan makes it past this, and the two drive away from the Lodge at top speed. The last glimpse they get of the Lodge is Taken roaming around it, and shadows pouring out of the doors and windows. As the two are driving away, Alan tells Barry to head to the Anderson Farm as quickly as they can. Alan tells Barry that Hartman and the kidnapper never had Alice, she is trapped underneath Cauldron Lake. But just as Alan tells Barry this, their car is upset by falling rocks and the two fall off a nearby cliff.
Wake ends up above the cliffs while Barry climbs from the wrecked car below uninjured. Fearing for his life after a Taken ambushes him, Barry tells Alan that he's going to the farm to secure the area and leaves carrying the Alan Wake cutout he stole from the diner to upset Rose. Alan finds a flashlight and eventually finds his way to a cabin. As he enters, he hears someone screaming and shooting upstairs. Alan finds Walt Snyder, whom he met at the jail, dying from wounds inflicted by Snyder's friend Danny, who has become a Taken. After defeating Danny, Alan drives to the farm only to end up on the Andersons stage. Reunited with Barry, Alan fights off the Taken while the Old Gods of Asgard song "Children of the Elder God" plays in the background. Making their way through the silo, they destroy a hay machine and finally enter the house. The message the Andersons left was written in another song called "The Poet and His Muse". Alan deduces that the Lady of the Light mentioned is in fact Cynthia Weaver. Barry proposes that since they can't leave until sunrise they may as well get drunk off the Andersons Moonshine. The moonshine causes Alan to unearth a suppressed memory of the night Alice went missing. It is revealed that after Wake thought Alice had drowned Jagger had used his grief to take control. She manipulates him into writing a manuscript to release the Dark Presence and make it stronger. However, Alan had some awareness left and secretly wrote Thomas Zane into existence to use his light to escape. Wake escapes while the Dark Presence suppresses Zane protection and throws him deeper into darkness. As Alan drives to safety, he loses conscious from his week in the cabin and crashes leading up to how the story started. Awake, Alan realizes that everything that has transpired is his fault. To make matters even worse, Agent Nightingale has tracked him to the farm because of the noise the previous night. After Nightingale remarks that Wake is going to pay for it, the episode ends.
- Ilkka Villi (model) and Matthew Porretta (voice) as Alan Wake
- Brett Madden as Alice Wake
- Fred Berman as Barry Wheeler
- Mark Blum as Emil Hartman
- Timothy McCracken as Agent Nightingale
- Kate Weiman as Barbara Jagger
- Lloyd Floyd as Tor Anderson
- Cliff Carpenter as Odin Anderson
- R.J. Allison as Pat Maine
- Andrew Totolos as Nurse Birch
- Mike Doyle as Emerson
- Shari Albert as Nurse Sinclair and Lorna Miles
- Kelli Harris as Wendy DeSole
- Gianfranco Negroponte, Navid Khonsari and Andrew Totolos as The Taken
- In this episode many Easter eggs are located. There is a room with an Xbox on a table along with a poster featuring death rally. There is also a picture opposite a tv (the one up stairs from the main room that has a short show of "the writer" on it) this picture is in the fire place opposite and can be used with Microsoft tag reader on a smart phone for Dr Hartman's number in the real world expanding the games plot to the real world. Alan Wake is the first game to use tag readers and there are others that can be found in other levels such a nightmare in episode one.
- Where is Cynthia Weaver?
- Can Alan really save Alice?
- When you leave your room in the first hallway, why are Anderson's and Desole's rooms the only ones that are locked?
- The Anderson brothers had been touched by the dark presence in the 70's, what did they "create"?
- Where did the Anderson's and the other patients at the Lodge go to after escaping?
- How much did Alan write before Thomas Zane took over?
- What happened during the week Alan couldn't remember? He was manipulated into writing a story by Barbara Jagger, a story that would become true, however he wrote it.