We learn through the flashbacks that David caught his wife fooling around with another man at some party they had attended. This obviously disturbed David so much that his psyche was shattered into two separate personalities. One of his personalities is capable of committing horrific acts (including murder) without the other knowing.
David wakes up at 2:06 AM and notices that his wife is not in bed. David finds her in the bathtub filled with bloody water. We don't know it yet, but David's bad personality (let's call it Charlie) killed her, leaving his good personality to think that she killed herself in the bathtub.
We also see that Emily was watching as her father pulls her dead mother from the bathtub. Witnessing this traumatic event obvisouly caused deep psychological problems with Emily. She is placed under observation in a New York Psychiatric hospital.
David feels (against the advice of her doctor) that it might be best for Emily's therapy to move to the countryside where she won't be reminded of the family's tragedy. This unknowingly gives Charlie a free reign to wreak havoc with both Emily and anyone else that enters their lives.
David continues to have these restless nights where he wakes up at 2:06 AM and discovers disturbing writings in blood in the bathtub. We (and David) don't know at this point yet who is doing this. We are just told by Emily that it is Charlie.
So, in summary, Charlie is David's second personality killing cats, killing people, writing in blood and all the while playing a seemingly innocent game of hide and seek with Emily.
An interesting sidenote: At the end of the movie when Emily is living with her therapist notice what Emily draws with a crayon. It is a picture of herself with two heads. This is up for discussion but I think it is the idea that she too has split into two personalities, just like her Dad. Probably not as much a stimulus for a sequel as it is just saying that the horror will continue. Althought the movie has ended, the nightmare (or the game) has not ended.
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