The Dream World is a recurring place in the Nightmare on Elm Street series and the home of Freddy Krueger. In this dimension, he is an almighty being, however he is weak if someone gets him into the real world.
Heather Langenkamp lives in Los Angeles with her husband Chase and her young son Dylan, and has become quite popular due to her role as Nancy Thompson from the Nightmare on Elm Street film series. One night, she has a nightmare in which she, Dylan and Chase are attacked by animated Kreuger claws of an upcoming Nightmare film in which two of the workers are brutally murdered on set. Waking up to an earthquake, she spies a cut on Chase's finger exactly like one he'd received in his dream, but they quickly dismiss the notion.
Heather receives a call from an obsessed fan who calls and quotes Freddy's nursery rhyme in an eerie Freddy-like voice which coincides with a meeting she has with New Line Cinema in which she is pitched an idea to reprise her role as Nancy in a new Nightmare film, which unbeknownst to her at the time Chase had been working on. When she returns home, she sees Dylan watching her original film, when she interrupts him he has a severely traumatizing episode where he screams at her. The frequent calls and Dylan's strange behavior cause her to call Chase who agrees to rush home from his work site as the two men from the opening dream did not report in for work. But Chase falls asleep while driving and is slashed by Freddy's claw which causes him to have a massive accident; his death seems to effect Dylan even further which causes concern for Heather's long time friend and former costar John Saxon who suggests she seek medical attention for both him and for her after Heather has a nightmare at Chase's funeral in which Freddy tries to take Dylan away.
Dylan's health continues to destabilize, becoming increasingly paranoid about going to sleep, fearing Freddy Krueger even though Heather had never shown him her movies. She visits Wes Craven who suggests that Freddy is an entity drawn to his movies, released after the series completed and now focuses on Heather, as Nancy as its primary foe. Robert Englund also has a strange knowledge of it, describing the new Freddy to Nancy, only shortly after disappearing from all contact. After another earthquake, Heather takes a traumatized Dylan to the hospital where the head nurse, suspecting abuse suggests Dylan stay for observation. Heather returns home for Dylan's stuffed dinosaur while his babysitter Julie tries to keep the nurses from sedating the sleep-deprived boy. Dylan falls asleep after the nurses sedate him successfully, and Freddy brutally kills Julie in Dylan's dream. Capable of sleep walking, Dylan leaves the hospital of his own accord while Heather chases him home across the interstate while Freddy taunts him and dangles him before traffic. Upon returning home, Heather realizes that John has established his persona as Don Thompson. Upon Heather's compliance in embracing Nancy's role, Freddy emerges completely into reality and takes Dylan to his world. Heather finds a trail of his sleeping pills like the story of Hansel and Gretel she'd read to him and follows him to a dark underworld. Freddy fights off Heather then chases Dylan into an oven, he escapes the oven and doubles back to Heather, and together they manage to push Freddy into the oven and light it, destroying the monster and then his reality all together.
Dylan and Heather emerge from under his blankets, and Heather finds a copy of the movie's events as a screenplay at the foot of the bed. Dylan asks if it is a story, and Heather agrees that it's just a story before opening the script and reading from its pages to her son.