Ghosting is taking no damage, giving no damage, and not alerting guards to your presence.
The full rules are listed on the Eidos Thief forums:
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1. Highest difficulty level available and playable, usually Expert, although it might be renamed by the author.
2. No combat damage may be dealt or taken and no knockouts or kills of any kind are allowed, whether or not they show up in the final stats, with the exception of rule 11.
3. Damage taken from falls, machinery, lava, etc. is allowed as a last resort, but such damage is frowned upon and must be reported.
4. No second level alerts, that is recognition or hunting alerts, of human or non-humans AI are allowed. This includes undead, fire elementals, spiders, bots etc. Rats are excluded.
5. Garrett must not cause suicides of AI or melees that intentionally cause AI to attack each other, with the exception of rule 12.
6. No property damage is allowed. No banners cut, no doors bashed in, no things burnt or destroyed, and no broken glass.
7. The use of potions, such as speed, breath, and invisibility, is allowed but frowned upon. Such use must be reported, and a ghost success so aided must be listed as "chemical success".
8. The use of quirks of the Dark engine is allowed, but only as a last resort, and must be reported. Examples include techniques such as "banner transmigration" and "nudging," as explained in part B.
9. No loot cheats or walkthroughs are allowed -- a point of honor that cannot be enforced.
10. It is not necessary to re-shut doors, re-light torches, return keys, etc.. There is no time requirement, no Ironman type requirement, etc.. Just finish the mission clean, damage free, and alert free.
11. Any mission objective that explicitly requires that one of the above rules be broken, such as "Kill the Haunts," is OK to complete and does not bust the ghost so long as no AI are alerted in the process.
12. AI behaviors that are programmed into the game (scripts) and that are not caused by Garrett's being seen or heard, are allowed if agreed by the consensus of the ghosting community. An example is the archer fight in Life of the Party.
13. The entire mission must be ghosted to claim success.
Perfect Thief Mode is defined as completing all of the above requirements and also obtaining the maximum loot available for the particular mission.
There are two other modes of Ghost that include even more rules--Strict Ghost was the original idea, which is not as forgiving as normal Ghost. Supreme Ghost doesn't allow even the smallest level of alert from the AI, and you have to clean up all traces of your presence: doors closed and re-locked, if they can be re-locked, and all keys that were pickpocketed from guards must be dropped on the guards' patrol routes.
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[8:18:42 AM] Joh Terraem: Cori, I've always found your encyclopedic knowledge of dicks to be quite charming and repulsive at the same time