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In her quest for power and revenge, the witch Scotia accidentally set into motion the revival of Belial, God of Evil. With her dying breath, Scotia gave her son Luther her mighty powers of shapeshifting, but through an error Luther received the powers in a damaged form: he cannot control when he changes or what he changes into. Things aren't easy for Luther: not only is he cursed with his mother's power, but the people of the Lands are understandably upset with Scotia and will attempt to take their frustration out on her son. With his mother's magic and a little help from the Draracle, an ancient being watching for signs of Belial's resurrection, Luther must find a cure for his curse and eventually stop Belial.

Guardians of Destiny is the sequel to Throne of Chaos and the second installment in the Lands of Lore series. Unlike its predecessor, it is an action RPG which occurs in real-time 3D (much like Daggerfall) rather than in grid-based environments. Luther is the only player-controlled character in the game and can freely move around, attack in all directions, jump, and crouch. The game features numerous video sequences featuring computer graphics and live action.

Luther's unique ability are his transformation powers, allowing him to morph into a powerful humanoid beast or a lizard. Though eventually the player gains control over them, initially these transformations occur at random. The beast form is stronger and able to smash obstacles on his way, but the lizard is more agile, can cast magic and access areas restricted to other shapes. Only Luther's native shape, however, is able to use weapons, both melee and range ones.

Unlike most role-playing games, experience points are not awarded directly for vanquishing enemies. Rather, Luther's weapon and magic proficiencies increase and reach higher levels the more the player uses correspondent combat styles. Typically, only defeating more powerful foes contributes to this growth. The player can also combine items to create new ones, and enhance Luther's weapons with them (e.g. making a poison sword). There are elements of puzzle-solving, optional areas, as well as moral decisions that influence the game's ending.