Freddy Krueger is trapped in Hell, it's 2003 and 4 years after the events and time of the sixth film and due to the fact the teenage residents of his town of Springwood, Ohio have forgotten about him, rendering him powerless, he can no longer return to Springwood, because there's no fear of him left in the entire town. He "can't come back if nobody's afraid", so, under the guise of Jason Voorhees' mother, Freddy manipulates Jason, who he'd been looking for over a period of time to do so, into killing the teenage residents of Springwood, hoping the mass fear will restore his powers. After all, residents of Springwood were terrorized by Freddy, not Jason, so obviously, every ounce of fear would be directed towards him, giving him more power than he'd ever hoped for. His plan works, but only to the extent of allowing his return.
Kris Fowles (Katie Cassidy) goes to the Springwood Diner to meet with her boyfriend, Dean Russell (Kellan Lutz), who falls asleep at the table and meets a man covered in burn scars, wearing a red and green sweater, a fedora and a clawed glove on his hand. The burned man cuts Dean's throat in the dream, but in reality it appears that Dean is cutting his own throat as his friend, waitress Nancy Holbrook (Rooney Mara), looks on with Kris. At Dean's funeral, Kris sees a photograph of her and Dean as children, but cannot recall ever knowing Dean before high school. Kris begins to dream about the burned man herself and refuses to go to sleep for fear that she will die in her dreams. Jesse Braun (Thomas Dekker), Kris's ex-boyfriend, shows up at her house to keep her company while she sleeps, but Kris meets the burned man in her dreams and is murdered. Covered in blood, Jesse runs to Nancy's house to try to explain what happened and he learns that Nancy has been having dreams about the same man: Freddy Krueger (Jackie Earle Haley).
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 Krueger 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.
Some time has passed since the events of the previous film, Kristen, Kincaid and Joey have been released from Westin Hills and are living lives as normal teenagers. When Kristen, believing Freddy is coming back, summons Joey and Kincaid into her dreams, she angers them and they warn her that dreaming of Freddy might actually cause his return. The next day, Kristen picks up her boyfriend, martial arts enthusiast Rick Johnson, and his sister and Kristen's best friend, Alice. Going to school she meets with her other friends: Sheila, a genius and asthmatic; and Debbie, a tough girl who doesn't like bugs. Alice daydreams of her crush Dan Jordan recognizing her, but she snaps out of it when Rick teases he can introduce them.
One year after the events of the second film, Kristen Parker is scolded by her mother Elaine to go to bed after staying up all night making a papier-mâché house. Kristen objects but obeys her mother. As she dreams, she is stalked in her model, which is revealed to be 1428 Elm Street, the home of Nancy Thompson and Jesse Walsh. Running from him, she wakes up in her own bed again and realizes it was a dream. The stalker, who is revealed as Freddy Krueger, then appears to her when she goes to wash her face and proceeds to slash her wrists with his claws. Elaine walks in, and Freddy makes the attack appear as a suicide attempt and has her admitted to the hospital for help. Going into hysterics after an attempt to sedate her, Kristen is calmed when Nancy Thompson, a newly hired member of the hospital staff arrives and earns her trust by finishing Freddy's nursery rhyme.
Five years have passed since Freddy Krueger was seemingly defeated and the Walshes have moved into the Thompsons' former home. Their teenaged son, Jesse, has a nightmare about being stranded on a school bus with two girls and being stalked by a violent killer. He wakes up in terror and attributes the dream to the unusual heat in the room. Jesse goes to school with his friend Lisa, whom he is interested in romantically, but is too shy to flirt with her. After getting into a fight with a boy named Grady during gym class, Coach Schneider makes them stay after class and they eventually become friends. Lisa comes to visit Jesse after school and they discover a diary from Nancy Thompson detailing her nightmares which are strikingly similar to Jesse's. Small fires happen around the house, which culminates in the spontaneous combustion of their pet birds. Jesse's father accuses him of sabotage. Lisa takes Jesse to an abandoned factory where Fred Krueger worked, but they find nothing there.
Taking place almost a year after The Dream Master, Alice and Dan have now started dating and there is no sign of Freddy Krueger. One day, while in the shower, she sees herself at a strange asylum. As she walks she finds that she is dressed in a nun's habit with a nametag saying Amanda Krueger. She is then attacked by patients at the hospital but wakes up before anything happens. The next day Alice is graduating from high school alongside her new friends consisting of Greta, an aspiring supermodel, Mark, a comic book geek and Yvonne, a candy striper who is also a swimmer. She only confides her nightmare to Dan, after he tells her about a trip to Europe. He tells her she is all in control of her dreams, and she goes to work.