This is the continuation of our previous paper “Contact Geometry of Second Order I”, where we have formulated the contact equivalence of systems of second order partial differential equations for a scalar function as the geometry of $PD$ manifolds of second order. In this paper, we will discuss the Two Step Reduction procedure in Contact Geometry of Second Order. In fact we establish the Second Reduction Theorem for $PD$ manifolds $(R; D^1, D^2)$ of second order admitting the first order covariant systems $\tilde N$. Utilizing the covariant system $\tilde N$, we construct the intermediate object $(W; C^:, N)$, called the $IG$ manifold of corank $r$, as a submanifold of the Involutive Grassmann bundle $I^r(J)$ over the contact manifold $(J,C)$, where $J = R/\text{Ch}\,(D^1)$. We will seek the condition when the equivalence of $(R; D^1, D^2)$ is reducible to that of $(W; C^*, N)$. Moreover, when $\text{Ch}\,(N)$ is non-trivial, the equivalence of $(W; C^*, N)$ is further reducible to that of $(Y; D_N^*, D_N)$, where $Y = W/\text{Ch}\,(N)$. This theorem gives a sufficient condition for the existence of higher dimensional characteristics of $(R; D^1, D^2)$. By analyzing the construction parts of the Two Step Reduction procedure, we will show several examples of Parabolic Geometries, which are, through the Second Reduction Theorem, associated with the geometry of $PD$ manifolds of second order.