A great war once raged across the land with many a valiant knight falling on the field of battle. In the end, the evil forces have prevailed, and have since taken over and corrupted the once great kingdom. On a stormy night a Wisp is awakened by a strange armored maiden. The wisp holds the memories of the war, and is now seeking all the valiant dead to be brought back to the world of the living in order to complete their mission and take back the land that was once theirs.
Knights in the Nightmare combines elements from tactical role-playing games and other genres, offering an active-time turn-based combat system reminiscent of Final Fantasy, alongside real-time strategy and bullet-hell shoot 'em up-like sequences. The gameplay is largely stylus-controlled on the PSP. As the player progresses through the game, they control the Wisp who can summon the spirits of fallen heroes to battle monsters in a variety of environments. By collecting objects that held significance to these warriors during their lifetime, the player can recruit them permanently into their party.
The game features a complex character customization system with various unit classes, multiple jobs per class, and a soul transplant system allowing for attribute transfers between characters based on their loyalty and relationship.