Kristen is trapped in a nightmare in the dilapidated house where Freddy Krueger, a killer with a finger-knives glove, used to try to kill her. Frightened, she calls for her friends, Kincaid and Joey, and pulls them into her dream. They tell her not to be afraid anymore because Freddy is dead. In the boiler room, Freddy’s furnace is cold, but, as Kristen touches it, Kincaid’s dog bursts from inside and bites her arm. All three then wake up in their own rooms, where Kristen’s arm is bloody from the bite and Kincaid’s dog has her blood on his fur. The next morning, Kristen picks up her boyfriend, Rick, and his quiet sister, Alice. At school, Alice sees Dan arrive and daydreams about flirting with the handsome athlete. They join their friend Deb who is horrified to find a cockroach in her breakfast and squashes the bug. Deb did not do her homework and begs smart, asthmatic Sheila to help. Kincaid and Joey tell Kristen to stop looking for Freddy in case it stirs him up and, as they walk down the hallway, Freddy’s signature slice marks appear on the lockers behind them. That night Rick and Alice’s alcoholic father returns home and yells at Alice about dinner. When she daydreams about screaming back at him, it only angers him further. Kincaid falls asleep and "awakens" in the auto salvage yard where Freddy is buried. But Freddy does not stay buried and kills Kincaid. As Joey admires a poster on his wall of a bikini-clad model, the waterbed beneath him starts moving. He pulls back the sheets to find the model has left the poster and is swimming inside the waterbed. She disappears as Freddy bursts from the bed, pulls Joey inside and drowns him. Rick wants Alice to stand up to their father and teaches her some ninja moves, but she is uncoordinated. At school the next day, when Kristen worries about her nightmares, Alice tells her about the “Dream Master” story, and says Kristen is in control and should dream of a fun place. Kristen becomes upset when Kincaid and Joey are absent. Rick tries to calm her, but she pulls away and hits her head. Kristen awakens in the nurse’s office, but the nurse turns into Freddy. Kristen screams and awakens in the actual nurse’s office. At the Craven Inn diner, Alice finishes her shift as a waitress when Dan arrives looking for her brother. Rick and Kristen arrive with the news of Kincaid and Joey’s deaths. Kristen takes Rick, Alice and Dan to the boarded-up house on Elm Street and they talk about Freddy Krueger, a child murderer who was burned alive by the Elm Street parents and now returns in dreams to kill the Elm Street children, including Kincaid and Joey. Kristen is the last of the Elm Street children. Kristen’s mother drives up, insists she return home, and drugs her with sleeping pills. Determined to follow Alice’s plan to dream about somewhere fun, Kristen wakes up on a tropical beach, but Freddy arrives and shoves her through the sand into his boiler room. Freddy wants Kristen to bring another friend into her dream and, though she tries to resist, Kristen calls for Alice. Kristen apologizes to Alice and tries to kill Freddy, but he tosses her into the fiery boiler. As Kristen dies, she passes her powers to Alice. When Alice wakes in her room, she and Rick race to Kristen’s house, but they are too late, Kristen is dead. Rick does not believe that Alice saw Freddy kill Kristen in a dream, but Alice knows it happened and part of Kristen is within her. At school, Alice notices Sheila looks tired, but it is not due to nightmares. Sheila studied all night for a test and also invented an electronic device for Deb to scare away cockroaches. In class, Sheila is attacked by her desk as she takes a test. Alice tries to help, but is trapped by her own desk. Freddy appears and sucks the air out of Sheila. Alice awakens to find Sheila in the throes of an asthma attack. Sheila dies and Alice is thrown back as she absorbs Sheila’s power. She also pockets the device Sheila invented. Dan shows up at the diner to check on Alice, who feels responsible for bringing Sheila into her dream. Alice also believes Freddy can only attack new victims if she brings them to him. At school, Alice falls asleep in her classroom while Rick falls asleep in a bathroom stall. He finds himself on a hellish elevator down to an Oriental suite where he’s attacked by an invisible Freddy. Rick channels his ninja warrior persona and fights back, but Freddy ultimately kills him. Alice jolts awake, screaming at her brother’s death. At his funeral, Alice daydreams that Rick gets out of his coffin and talks to her. Realizing the time for daydreams is over, she plans to meet Dan at the diner that night where they then go to Deb’s home to plan an attack on Freddy. Deb gives Alice a studded leather bracelet for good luck and, as Alice leaves, Dan and Deb note that Alice has changed after each death, seeming to absorb the dead person’s personality. At home, Alice picks up Rick’s nunchuks and is suddenly skilled at using them. Dan waits outside the diner, but Alice must wait to sneak past her father before she can leave the house. When she finally arrives at the diner, Dan is not there. She is drawn to a theater across the street and, as she watches a movie featuring the diner, she’s pulled into the screen by a strong wind. Inside the dilapidated diner, an older waitress also named Alice takes her order. Freddy arrives as the waitress delivers a pizza covered with the tiny screaming faces of teens. Freddy pierces a teen’s head and eats it as he orders Alice to bring him more teens. As the diner’s doors open to reveal Deb exercising, Alice wakes in her bedroom. She races to meet Dan and they drive to Deb’s house. Alice runs inside only to re-arrive at the diner as if nothing happened. Dan and Alice repeat this endless loop before realizing they are dreaming. Meanwhile, Freddy appears at Deb’s, turns her into a cockroach, traps her in a roach motel and squashes her to death. As Deb dies, Alice is hit with Deb’s power. She sees Freddy in the road and tries to run him over, but only destroys the truck and injures Dan. As Dan is wheeled into surgery at the hospital, Alice goes home, dresses for battle and arms herself with the items her friends bequeathed her. In her mirror, Alice sees Freddy is about to perform surgery on Dan. She dives through the mirror to rescue Dan and they fly through a stained glass window into a decrepit church. Dan suddenly disappears as, in the actual hospital, doctors save his life and wake him. Freddy arrives and Alice, channeling all her friends’ powers, attacks him. Freddy, however, just laughs that she may have their powers, but he has their souls. As they face off, Alice pulls out Sheila’s device, plugs it in and a surge of electricity blows a hole through Freddy. Laughing, he magically repairs the hole. Alice sees a piece of mirror, remembers a childhood refrain and holds the mirror up as she yells, “Evil will see itself and shall die!” When Freddy sees himself in the mirror, the souls he has trapped in his body attack him. Freddy explodes and the souls are freed. Later, Alice and Dan walk by a fountain and, as they toss a coin into it and make a wish, Alice thinks she sees Freddy reflected in the water, but he is not there and the couple strolls off hand in hand.