Phantom Dust begins with a surface expedition over a decayed landscape. Two pods are found containing two men in an unconscious state in the center of a huge crater, the two men are Edgar and the Protagonist (called the Protagonist because his name can vary depending upon the choice of the player). Having both been exposed to the Dust for a prolonged amount of time they can not remember much of anything. The Protagonist and Edgar set out on a quest to answer many of the questions they have. What happened to make earth such a desolate place with cites in ruins all over the planet? Where did the Dust come from? Why does the Dust give them psychic powers? Furthermore, why does the Dust cause memory loss? In regards to Edgar, who is this woman in the locket around his neck and why does he keep dreaming of her? Why does everyone have a vague recollection of this place they only know of as the "Ruins" but have no idea where it is?
After a few tests it is found that the Protagonist and Edgar have remarkable ability to manipulate the Phantom Dust and may be more powerful than any of the Espers in the underground city. The Visions, the ruling body of the underground city, begin to send the two men on mission to the surface for investigations and supply gathering. After a few trips to the surface the Protagonist is confronted by a woman named Freia. This is after she lifts a fellow Esper into the air and snaps his arm like a twig. She warns him to quit searching for the truth or he will die along with everyone else. Freia warns that if she has to she will be the one to kill him to prevent it. Those of the underground have encountered Friea before and they fear her. For some unknown reason she is able to survive on the surface without any apparent ill effects.
After the second encounter with Friea, Edgar sees Friea in the flesh before she flies away. After this Edgar begins to . He is haunted by the image of this woman. All he has is a locket with her picture inside which he obsesses over. After a tantrum the Protagonist must fight Edgar. After the fight Edgar abandons the underground and goes searching the surface for this woman. He finds her and it is definitely this Freia he has been searching for.
The Protagonist is driven on to discover the new questions that Edgar's disappearance is raising. On the surface, he finds Freia and Edgar together after defeating a couple of what seems to be his minions, Edgar warns him but eventually concedes to show him something and hands over a Memory Box. In this Memory Box is a video log of Edgar's.
The video log shows that Edgar was an astronaut of some sort. He was sent to explore a black horizon. His navigation system broke down and he was almost sucked inside of it. His ship was accelerated to relatavistic (close to light speed) velocities and 10,000 years passed outside of his ship while he only experienced 3 days of time. When he fixed his ship and returned to Earth he discovered the surface had been wiped clean and all that was left was a fog of dust. He soon discovered that the "Phantom Dust" granted him telekinetic powers and began experimented with the dust.
As he grew lonely and desperate he attempted to create other humans. He failed many times creating horribly disfigured and decaed automatons. After many tries he eventually created Freia, the girlfriend he left behind when he went into space. He then recreated his best friend, the Protagonist. After a while he began creating entire cities of people like he'd left behind, full with life.
But these creations still left him lonely and unsatisfied. All these people were simply illusions that he nicknamed Visions.
After watching the video log and learning they were nothing but a figment of someone's imagination the people that watched begin to fade into nothing. This caused the leaders of the Visions to disappear all at once, all but one...the Protagonist. Those in the underground blame the Protagonist for the Visions disappearance further fueled by the fact that he will not say what happened in the Visions Headquarters. He can't say anything he knows for anyone that finds out the truth risks becoming non-existent.
The Protagonist then, after a long search, finds the "Ruins" and Edgar and Freia are there, waiting for him. It's revealed that Edgar wants to wipe the slate clean. Everyone must be destroyed since they are just memories. The Protagonist fights to stop him and succeeds, killing both Edgar and Freia. After searching the ruins he finds the run down spacecraft. In the computer is a memory box which he plays. It's the last log that Edgar made. In it Edgar is dying. As he stayed on Earth longer his health declined and with the last of his strength he created a copy of himself to take care of the world (this is possibly the same Edgar within the game, what is not known is if the first copy made more copies, which is entirely possible). He then gives the Dust it's amnesia qualities to protect the visions so they will never be able to find the truth. This is the knowledge that Freia was trying to protect from the Protagonist all along. It was the truth that could destoy them all.