Grays Tina (Amanda Wyss) has a dream in which she is chased into a dark room from a boiler mutilated figure with distinctive razor sharp knives attached to the fingers of his right hand. Just as he grabs, however, wakes up screaming, only to discover four razor cuts in her nightdress identical to the cuts in her dream.

The next day, she discovers that her friend Nancy Thompson (Heather Langenkamp) had a similar dream involving the same figure the left, but Nancy is convinced that all is well. That night, Tina, Nancy and her boyfriend Glen Lantz (Johnny Depp) has a sleep-over to make the distraught Tina feel better as she is still upset from his nightmare. Tina's rebellious boyfriend, Rod Lane, (Nick Corri), crashes the party. He and Tina have sex in the bedroom of his mother. However, Tina has another nightmare, and this time catch the killer and brutal murders. Rod wakes up to find Tina cut open by invisible knives and then dragged up the wall and ceiling. Rod, since the only other person in the room at the time, is accused of murder, he flees the house and was captured the next day.

Nancy then three violent nightmares, in which she is fiercely chased and then attacked with the same terrifying figure who attacked Tina. These nightmares make her talk with Rod in prison, who tells her what he saw in the bedroom of his mother Tina, and remarks he had a nightmare involving the devil with "knives for fingers." With great disappointment of her mother Marge (Ronee Blakley), Nancy becomes increasingly convinced that the figure appearing in her dreams is the person who killed Tina. After Nancy has another dream in which he sees the mysterious killer cell Rod, she and a skeptical Glen race at the police station late at night to help Rod, only to find out who was strangled by her own sheets. For all but Nancy appears to be a suicide.

Nancy's mother takes her to a therapy clinic to ensure that dream gets some sleep. Again, it has a horrible nightmare. This time, his arm is badly cut, but discovers that she has done something out of his dream: the killer's battered hat. It arouses concern, but also other feelings in Marge, who is clearly hiding a secret. Finally, while drunk, Marge tells Nancy that the owner of the hat, and the murderess, was a man named Fred Kruger (Robert Englund), a child murderess who killed at least twenty children over a decade before . Furious, vengeful parents burned him alive in her boiler room hideout when he was released from prison on a technicality due to a search warrant signed improperly. Now, it seems that is manipulating the dreams of their children to revenge from the grave. Nancy's mother, however, reassures Nancy that Krueger can not hurt anyone, pulling blades Krueger glove from a hiding in the oven as evidence. Eventually, Marge bars installed on all windows and begin to close the door as "security."

Nancy and Glen devise a plan to capture Krueger, but Glen falls asleep at night when it was pulled in his bed and regurgitated as a puff of blood and bones. Nancy is left alone with Krueger after by pulling out his dream in real life. She runs around her house and forces him to run into booby traps she had set earlier. After setting fire Krueger Nancy blocks in the basement and finally obtained his father, police Lt. Donald Thompson (John Saxon) and the rest of the police for help. After discovering that Krueger has escaped and that fiery footsteps lead upstairs, Nancy and her father's testimony Marge Krueger choking with her body on fire, disappearing to the body to sink into the bed. After sending the father away, Nancy faces Kruger alone and manages to destroy him, turning his shoulders and emptied of all energy.

The scene moves to the next morning, as Nancy puts it in a car with Glen and the rest of his friends on their way to school. Krueger owns the car just as she is a. The car moves away with Nancy screams of his mother, Marge and be pulled through the door window by hand with shovels Krueger.