The story begins in a boiler room factory. An unseen man is creating a glove with metal blades attached to the fingertips. After the glove is completed, the man tries it on and flexes his fingers. We then see the man's eyes, as one of the blades reflects in it, and the man glares. We then cut to Buttercup of the Powerpuff Girls, who is now in the factory. A voice calls to her. "Buttercup", it says. The voice repeats, and Buttercup investigates. Just as Buttercup thinks she's onto something, a burned man, wearing the bladed glove, walks out, and attacks Buttercup. Just as he is about to kill the tomboy, she wakes up in her room, and finds cuts in her arm, similar to ones she received in her dream, and everybody begins to worry.

We then flashback to earlier in the day, when the Professor comes in with a human skeleton. He reveals that it belongs to the infamous Freddy Krueger, a child molester and child murderer from the 1960s who was burned alive by the parents of his victims. The skeleton is also wearing the bladed glove. The Professor then reveals that he intends to experiment on it to find a way to keep burn victims alive. We then cut to that night, and Buttercup has her dream and wakes from it. The next morning, Buttercup is getting her wounds patched up when the girls get a call from the mayor saying that Ms. Bellum has been brutally murdered.

The girls respond, and head to City Hall to investigate. Upon examination, they find four slashes in Bellum's chest, similar to Buttercup's wounds. Buttercup suspects that this murder is somehow connected to the incident last night. Later that night, the girls stay awake to watch for the killer. However, things take a turn for the worst when the Professor's screams are heard coming from his room. They rush in, and find him flailing as four slashes are put in his chest by an unseen force, and the Professor is brutally dragged across the wall and ceiling by the same force, and he then falls to the floor. The girls suddenly remember the skeleton and the bladed glove, and realize that Freddy Krueger has returned from the dead to seek vengeance from beyond the grave. The girls then fall asleep, and find themselves in the boiler room. Freddy's laugh is heard down the hall, and the girls head in the direction it's coming from.

Just then, Freddy pops out of a boiler, and introduces himself. The girls then attack Freddy, who is able to stay one step ahead of them due to his power over the dream realm. At first, the girls have no idea how he is able to stay ahead of them, but soon realize that he gets his power from their dreams. Freddy also reveals that he knows what the girls are afraid of, and uses their fears against them. However, the girls are able to overcome them, and they eventually pull Freddy out of the dream world, rendering him powerless. They also discover that he gets his powers from a trio of demons known as the Dream Demons, and they pull the demons out with the Professor's Extractor Machine, and Freddy is reverted back to his unburnt form. The girls then pin Freddy to the wall and ask him why he kills people.

Freddy gives in, and tells the girls of his tragic past. Bubbles feels sorry for the man, but Blossom and Buttercup kill him by blowing up his body. Bubbles then reveals that she pitied the man, and the girls decide to travel back in time to the day Freddy was born, and put him with a more loving family. They borrow the Professor's time machine, and travel back to 1942, to the day Freddy Krueger was born. They arrive at the hospital just as Amanda Krueger is giving birth to the boy. Just as Amanda is about to have the child put up for adoption, the girls come in, asking to take the child, claiming to have always wanted a little brother. Bubbles takes the baby, who becomes quickly attached to the kind-hearted superhero. The girls then leave the room, but Buttercup stays for a minute, and slaps Amanda twice, once for almost sending Freddy to endure abuse, and once for claiming that Freddy "is no creature of God". She then leaves with the girls.

Later, the girls drop Freddy off at the residence of a family known as the Georgesons. The woman of the family, Barbara Georgeson, answers the door when the girls knock. The girls give the baby to her, claiming to have found him on a bed of moss on their way home from school. Bubbles bids the baby farewell and kisses him on the forehead before handing him to Barbara. Once Barbara enters the house, the girls leave, then go back to the present. They begin wondering if their actions changed anything. Suddenly, they see Freddy, who is wearing his bladed glove. At first, the girls believe they changed nothing, but then Freddy reveals that he was practicing for a movie he's making. They then discover that Freddy has become a horror enthusiast instead of a serial killer. They then discover that while Freddy still came up with the idea of the glove, he uses it as a prop instead of a killing tool. They then discover that he starred in the 1958 film adaption of "Dracula" as Christopher Lee's stunt double. The girls invite Freddy into the house, and he pulls out his "Box of Memories", which contains some works of his, including drawings of Bubbles and his bladed glove, which he says were inspired by dreams he had as a child. After a while, Freddy claims that he has to leave, and the Professor, who is revealed to be alive, bids Freddy farewell as he exits the house and walks off into the sunset.