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Shadows of the Damned is a third-person shooter starring the Mexican demon hunter Garcia Hotspur. His girlfriend Paula is kidnapped by Fleming, Lord of the Demons, and even though he is initially unable to stop him, he follows him into the underworld to get her back. Garcia is assisted by his sidekick Johnson, a skull that can take on different types of forms. It acts as a torch for melee attacks, but can also transform into a pistol, a shotgun or an automatic rifle. Each of the three gun forms can be further upgraded by collecting blue gems left behind by bosses. There are also red gems that are used to upgrade the other abilities, along with health. Health can also be restored through alcohol.

Darkness is an important part of the gameplay and the environment puzzles. Garcia can only reside in dark areas for a short time before his health starts to drain. This can be avoided by shooting and lighting goat heads, setting off fireworks or killing the demons that spread the darkness. For these events a special light bullet needs to be used. Garcia meets characters such as Colonel, and the half-human half-demon Christopher who acts as a salesman to purchase goods.

Certain levels have complete different gameplay and resemble mini-games, such as a 2D side-scrolling shooter with very different art design for instance. The action is often over the top and the conversations carry a humorous tone.