
"It's A Boy!"
After surviving the events in The Dream Master, Alice and Dan have moved on together, a happy couple. In a very loving relationship, they are having the time of their lives as they graduate high school and prepare for a vacation in Europe.
However, Alice, who was in firm control of her dreams since sending the demonic Freddy Krueger back to hell, begins having nightmares once again, but doesn't know how or why it is happening. If she was in full control, how could Freddy come back? She tells Dan about it, and he tells her to play it cool and that "if you don't dream him up, he can't hurt you."
Alice relents and goes to work while Dan heads to the local swim club to celebrate graduation with their close friends Mark, Greta, and Yvonne. Most of the daring senior class shows up and begins to drink and party at the pool. Meanwhile, at work, Alice blacks out, and enters the dream world while she was still awake.
In the dream world, Freddy somehow finds a way to come back, and is re-born, rubbing her stomach and telling her that "I found the key." Alice also sees a mysterious nun who tells her to "go to the tower," but is stopped when Freddy shuts the door on her. When Alice comes out of her trance, she immediately calls Dan, who grabs a bottle of wine that he saved for them and heads out to get her. On his way, Dan falls asleep at the wheel, and is easy prey for the dream stalker. Freddy mangles and melts his body to a motorcycle, and causes Dan to crash his truck into a semi right outside of the diner where Alice works. Alice's worst fears are confirmed. Dan was dead. Convinced Krueger was responsible, she tried to tell Yvonne, who would hear none of it. The authorities and Alice's father agree that the alcohol found at the scene was an indication that Dan was drunk and driving, and that caused his accident.
Alice knew the real story, but she had no idea how Freddy came back, until Yvonne revealed startling news to her. She was pregnant.
Freddy then continues his rampage, claiming Greta as well, who mysteriously choked to death at dinner, despite not eating a bite. Alice tries to tell her two remaining friends, Mark and Yvonne, to be prepared. Neither of them believe her, but Mark is forced into the truth when he gets slashed up in his dream. Alice is lucky enough to go into his dream and help him escape, and Mark shows Yvonne the scars. Yvonne, still not convinced, thinks Alice is crazy. Alice gets Yvonne, a nurse, to help her get a sonogram for her baby Jacob, who she begins to see in her dreams, even when she is awake and daydreaming. Alice wastes no time and asks the doctor if unborn babies can dream, and he throws up a red flag and reports Alice as being unstable and unfit to raise a child. Dan's parents attempt to adopt the baby after it is to be born, but Alice's father puts an end to it.
It was then that Alice realizes that Krueger used her baby Jacob's dreams to come back for his revenge. Mark became the next victim, as Freddy pulled him into one of his own comic books and slashed him up into pieces. Alice, at wit's end, is desperate as Freddy moves in for Yvonne next.
Yvonne and Alice split up in the dream world, with Yvonne searching for the tower and the missing nun, and Alice goes in to save Jacob, who Freddy has "adopted." Would Yvonne be successful and who was that nun in the tower? Can Alice succeed and save herself and her baby, or would Freddy have his revenge in this battle for 'The Dream Child'?

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