In the dreams of his victims, a spectral child murderer stalks the children of the members of the parents that killed him.
An unknown person in a boiler room creates a glove with razor-sharp knives embedded in the fingers. High school student Tina Gray (Amanda Wyss) has a disturbing nightmare in which she is stalked through the boiler room by a severely burned figure with the bladed glove on his hand. When he finally catches her, she awakens screaming in her own bed. However, her nightgown has four slashes in it, identical to the ones given to her in the dream by the unknown man's razors, and she is not convinced it was just a nightmare. The next day, Nancy Thompson (Heather Langenkamp) recalls a nursery rhyme from Tina's description when they meet up with Nancy's boyfriend, Glen Lantz (Johnny Depp). Tina's boyfriend Rod Lane (Nick Corri) shows up as well. Nancy admits she also had a bad dream and all of them dismiss the topic of the nightmare, though Tina is visibly disturbed.
That night, Nancy and Glen go to Tina's house because her mother is out of town and Tina is still troubled by her nightmare. Tina describes the killer in her dream, which intrigues Nancy, who adds to the description having seen the same killer herself, also getting Glen's silent attention. Rod crashes the party and he and Tina have sex while Glen and Nancy sleep in adjoining rooms. Rod also tells Tina he's been having nightmares, but neither of them think about it and go to sleep. Once asleep, Tina is once again stalked in her dreams by the hideous figure, who taunts her repeatedly before attacking. This time, he catches and attacks her. Her struggles awaken Rod who watches Tina get slashed by the glove and dragged up the wall and across the ceiling, screaming his name and alerting the others before she falls dead onto the bed. Because Rod was the only one in the same room as Tina, he is suspected of the murder and is arrested the next day.
While at school, Nancy has a terrifying nightmare in class where she is attacked by the same figure that killed Tina. Nancy leaves the school early and goes to the jail to talk to Rod, who describes what he saw the night Tina was killed, which reminded him of his own nightmares where he was also stalked by the figure wearing the glove. To her shock, Nancy realizes that Rod did not kill Tina and leaves. Later, she begs Glen to watch her while she sleeps so she can investigate her dreams further. Glen hesitates, but accepts. When Nancy goes to sleep, she sees the killer enter Rod's jail cell and suspects that Rod is in danger. When she wakes up, she and Glen rush to the police station only to find Rod dead, hanged by his own bed sheets. Everyone believes he committed suicide, but Nancy and Glen think someone else was in the cell with him.
At Rod's funeral, Nancy's mother, Marge (Ronee Blakley) insists on getting her daughter psychiatric help. However, while at the clinic to evaluate her dreams, Nancy has a violent encounter and awakens with a streak of white in her hair, and a slash on her arm. Much to Marge's horror, Nancy also pulls the killer's battered hat out of the dream with her, which Marge recognizes. Marge begins to drink heavily and installs security bars on all the windows and the door. She reveals to Nancy that the owner of the hat and the burned figure from her nightmares is a man named Freddy Krueger (Robert Englund). Years ago, he was arrested after murdering 20 children, but due to a technicality, he was released. Soon after, the enraged parents of the murdered children took the law into their hands by burning Freddy alive. It now appears that he is exacting revenge from beyond the grave against the parents that killed him by killing their children from within their dreams.
Nancy tells this to Glen, who advises her to turn her back on her fear and to take the energy of the killer away from him, but she plans to pull Freddy from the dream world where she and Glen can stop him. However, both Glen and Nancy's parents lock them inside their respective houses, keeping them from meeting. Glen later falls asleep and is killed when Freddy pulls him into his bed and he is regurgitated as a geyser of blood. Still unable to get her father (John Saxon), a police lieutenant, to believe her, she tells his deputy Don to break down the door of her house in 20 minutes and then goes to sleep to hunt down Freddy.
Nancy finds Freddy in her last few minutes of sleep and grabs hold of him when her alarm goes off, waking her. When she doesn't see him at first, she thinks she's gone crazy, but Freddy eventually appears, and the two face-off. Nancy proves to be a match for him, setting up several booby traps and making him fall into every one, then lighting him on fire and trapping him in the basement before calling her father. Don arrives with other policemen to put out the fires. He and Nancy then follow a trail of footsteps up to Marge's room and discover Freddy smothering her with his flaming body. They knock him out but he disappears, leaving Marge's body vanishing slowly into the bed. Nancy sends her father from the room and turns her back as Freddy rises from the bed. She proclaims she is no longer afraid of him, causing him to lose his powers. Freddy lunges forward but vanishes as she walks out of the room.
Exiting the bedroom, Nancy steps out into daylight from her front door and her mother appears well and sober, promising to stop drinking as her friends pull up in Glen's convertible. Suddenly, the roof of the convertible clamps shut—the material an exact match to the pattern of Freddy's sweater—and the car starts moving of its own accord. The film ends with Nancy screaming as she is driven off with her friends as Freddy drags Marge through the front door's window.Source: Wikipedia