Dylan's health continues to deteriorate. He becomes increasingly paranoid about going to sleep, and fears Freddy Krueger, even though Heather has never shown Dylan her films. She visits Nightmare creator Wes Craven, who admits to having precognitive nightmares that the films captured an ancient supernatural entity. The entity is freed after the film series ended with the release of Freddy's Dead: The Final Nightmare. In the guise of Freddy it now focuses on Heather, as Nancy, its primary foe, as killing her will allow it into the real world. Freddy actor Robert Englund also has a strange knowledge of it, describing the new Freddy to Heather, and then disappearing from all contact shortly after. Following another earthquake, Heather takes a traumatized Dylan to the hospital, where Dr. Heffner, suspecting abuse, suggests he remain under observation. Heather returns home for Dylan's stuffed Tyrannosaurus while his babysitter Julie tries unsuccessfully to keep the nurses from sedating the sleep-deprived boy. Dylan falls asleep from the sedative. Freddy brutally kills Julie in Dylan's dream. Capable of sleepwalking, Dylan leaves the hospital of his own accord while Heather chases him home across the interstate as Freddy taunts him and dangles him before traffic. On returning home, Heather realizes that Saxon has established his persona as Don Thompson, and her street, the exterior of her house, and her clothes have transformed into Nancy's as reality starts to overlap with Freddy's make-believe realm. When Heather embraces Nancy's role, Freddy emerges completely into reality and abducts Dylan to his world. Heather finds a trail of Dylan's sleeping pills and follows him to a hellish construct of Freddy's boiler room.[1] Freddy fights off Heather and chases Dylan into a furnace. Dylan escapes the furnace, doubles back to Heather, and together they push Freddy into the furnace and light it. This destroys both the monster and his reality.
Dylan and Heather emerge from under his blankets, and Heather finds a copy of the film's events in a screenplay at the foot of the bed. Inside is written thanks from Wes for defeating Freddy and playing Nancy one last time. Her victory helps to imprison the entity of the film franchise's fictitious world once more. Dylan asks if it is a story, and Heather agrees that it is before opening the script and reading from its pages to her son.