Three months after the events of The Final Friday, Freddy Krueger, now powerless in hell because the residents of Springwood have forgotten about him, disguises himself as Pamela Voorhees to manipulate Jason Voorhees into killing Springwood teenagers to create fear and regain his strength. Lori Campbell lives with her widowed father, and her friends Kia and Gibb, are sleeping over. They are later joined by Trey, Gibb's boyfriend, and his friend Blake, whom Kia tries to get Lori to hook up with, much to Lori's disgust. Jason kills Trey that night, and the police suspect Freddy. After a nightmare, Blake awakens to find his father killed before Jason kills him. The police call it a murder�suicide the following day, hoping to contain Freddy.
Lori's ex-boyfriend Will Rollins and his friend Mark Davis are patients at the Westin Hills Psychiatric Hospital, and take Hypnocil to suppress their dreams because of their previous contact with Freddy. A news report prompts them to escape and return to Springwood to tell Lori about Freddy. That night, Lori and the others attend a rave in a cornfield. Freddy tries to kill Gibb in a nightmare, but Jason kills her and several other attendees in the real world; this makes Freddy realize that Jason's rampage will deny him victims.
Linderman and Freeburg escape the rave with Will, Lori, and Kia. Lori and Will go to Mark's house, and find Freddy killing him. Deputy Stubbs approaches Lori and her friends, who realize Freddy's plan. Learning about the Hypnocil, they try to steal it from Westin Hills; Freddy possesses Freeburg, however, who disposes of the medicine. After electrocuting Stubbs, Jason is tranquilized by the possessed Freeburg and kills him before he falls asleep.
The teens devise a plan to pull Freddy from the dream world into reality and force him to fight Jason, bringing the unconscious Jason to the now-abandoned Camp Crystal Lake. Freddy fights Jason in the dream world, where his dream powers show him that Jason is afraid of water because of his death by drowning. He uses water to make Jason powerless, but Lori goes to sleep and tries to save Jason. Freddy attacks her and reveals himself as her mother's killer.
