1:20 A.M.: The story begins with 16 year-old Kristen Parker (Patricia Arquette) creating a papier Mache model of 1428 Elm Street. The house, originally inhabited by Nancy and Jesse from the preceding Nightmare on Elm Street movies, has been haunting her dreams. As she works, Kristen blasts loud music on her radio, eats coffee crystals from the jar, and swigs Cola in a desperate attempt to stay awake.
Kristen's middle-aged mother Elaine (Brooke Bundy) bursts in, annoyed that her daughter is still awake and reveals that Kristen has been seeing a therapist for her nightmares. Elaine is accompanied by a guy she has met and is in a hurry to return to him. She tucks Kristen in and goes downstairs leaving Kristen to fall asleep.
Kristen awakes in her dream, to find her bed is in front of the shuttered, condemned Elm street house. Children play outside, singing the infamous "Freddy" rhyme as they jump rope on the front lawn.
A little girl wearing a yellow party dress and riding on a red tricycle, waits on the porch of the house as Kristen approaches cautiously. Kristen speaks to the little girl. We hear Freddy's blades scrape and the little girl turns and rides into the front door entrance. Kristen follows her, pleading with her not to go in to the house, and descending stairs into a darkened basement.
"This is where he takes us!" the little girl announces as a boiler bursts into life, flames consuming the skulls and bones of young children. Hearing the sound of footsteps above, the girl added, "Freddy's home." Kristen grabs the girl and flees in blind terror from madman Freddy Krueger (Robert Englund), becoming trapped as the floor melts.
Freddy chases her as she runs round the corner into hanging bodies of teenaged corpses. "Put me down, you're hurting me!" the little girl asks. Kristen looks down and screams when she sees she is clutching a dead and rotting body. Kristen thinks she awakes from her nightmare, but she is sleeping-walking to her bathroom.
She goes to turn on the 4-pronged water, tap but it turns into a hand, grabbing her and holding her in place, before she sees the image of Freddy Krueger appear in the mirror. The second tap also turns into a hand, with tiny blades at the end, like Freddy's claw. Freddy slices across Kristen's wrist, her screams finally bringing her mother. As Kristen's mother bursts into the bathroom Kristen wakes properly to find herself clutching a razorblade, blood oozing from her wrist and passes out.
The next scene takes us to Weston Hills psychiatric hospital. Max, the orderly and Dr. Gordon discuss a rash of teen suicides which have swept the area. They meet Taryn, a girl not sleeping, and Jennifer, a girl who has been self-harming, putting cigarettes out on her arms.
He looks in on another boy in solitary for his violent outbursts. Dr Simms approaches and they talk about a new member of staff who has just left grad school, but has been making lots of progress with "pattern nightmares." Dr. Gordon is not keen on someone using "his kids" to further their own career. At that moment an emergency message asks for both doctors to go to the examination rooms. Screaming can be heard as Elaine Parker discusses with a nurse her daughters attention seeking behaviour.
As the doctors enter the room we see Kristen fighting and screaming hysterically as doctors try to sedate her. She grabs a scalpel begins to recite the rhyme: "1, 2 Freddy's coming for you, 3, 4 Better lock you door, 5, 6, Grab your crucifix, 7, 8 Better stay up late, 9, 10 . . . . " She can't bring herself to speak the last line. Someone completes the last line, "Never sleep again" and everyone turns to see Nancy standing in the doorway. Nancy walks in and calmly takes the scalpel from Kristen before pulling her into a hug.
Nancy asks Dr. Gordon about the kids who all suffer from sleep disorders, including insomnia, narcolepsy and bed-wetting but all have nightmares in common. He believes they share a "group delusion" of a boogey man, which scares them so much they will do anything not to sleep.
He elaborates with the story of a young boy who used razor blades to cut off his own eyelids to stop him sleeping. He praises her dealing with Kristen, and she reveals that she has had some experience with pattern nightmares. As she leaves, she drops her handbag and we see that Nancy is taking medication. He recommends she speak to Max and watches her leave.
As he turns Dr. Gordon sees a nun dressed all in white who seems to then disappear. Max shows Nancy to an office she can use and introduces her to some of the patients. First is Phillip, nicknamed the Walker because he sleep walks and who makes puppets. He shares a room with Kincade, the boy who was in solitary. Max jokes that Nancy should memorize his face as Kincade spends so much time in solitary she won't see much of him. Another patient Joey leaves his room to help a young nurse pick up towels which has fallen from her trolley.