Kristen Parker dreams of Freddy Krueger, who attacks her and makes it look like she has slit her wrist in the real world. Believing Kristen to be suicidal, her mother Elaine admits her to Westin Hills Psychiatric Hospital, where she is placed under the care of Dr. Neil Gordon.
At the hospital, Kristen fights the orderlies who try to sedate her because she fears falling asleep. Nancy Thompson, the new intern therapist who survived Freddy's killing spree six years prior, calms her down by reciting Freddy's nursery rhyme, helping her realize she is not alone. Nancy meets the rest of Dr. Gordon's patients: Phillip Anderson, a sleepwalker; Roland Kincaid, a tough kid from the streets; Jennifer Caulfield, a hopeful television actress; Will Stanton, who uses a wheelchair due to a prior suicide attempt; Taryn White, a recovering drug addict; and Joey Crusel, who is the youngest and too traumatized to speak. One night, Freddy attacks Kristen in her dreams; she unwittingly pulls Nancy into her dream, allowing them to escape.
Kristen reveals that she has been able to pull people into her dreams since she was young. Over the next two nights, Freddy kills Phillip and Jennifer. Nancy reveals to the remaining patients that they are "the last of the Elm Street kids," the surviving children of those who burned Krueger to death years ago. They try group hypnosis so that they can experience a shared dream and discover their dream powers. In the dream, Freddy captures Joey, leaving him comatose in the real world. The dean is furious, and Nancy and Neil are relieved of their duties. A nun named Sister Mary Helena tells Neil that Freddy was the son of Amanda Krueger, a young woman on the Westin Hills hospital staff who was accidentally locked inside with hundreds of mental patients over the holidays. They raped her continually, causing Freddy to be born. The only way to stop him is to lay his bones to rest.
Neil and Nancy ask her father, Officer Don Thompson, where the bones are hidden. Nancy rushes back to the hospital when she learns that Kristen has been sedated. Neil takes Don to help them find the bones. Nancy and the others again engage in group hypnosis to reunite with Kristen. Taryn and Will are killed by Freddy, while Kristen, Nancy, and Kincaid rescue Joey. Sensing that his remains have been found by Don and Neil, Freddy kills Don and incapacitates Neil. Don's ghost appears to Nancy, but he is revealed to be Freddy, who stabs Nancy. Freddy comes upon Kristen, but Nancy stabs him with his own glove. Neil purifies Freddy's bones, killing him, as Nancy dies in Kristen's arms.
Neil, Kristen, Kincaid, and Joey attend Nancy and Don's funeral days later. During the funeral, Neil finds Amanda Krueger's tombstone and discovers that she is Sister Mary Helena. That evening, he goes to sleep with the Malaysian doll Nancy gave him and Kristen's papier-mâché house nearby. Suddenly, Kristen's house lights up from the inside, suggesting that Freddy is not defeated.
Following the critical failure of A Nightmare on Elm Street 2: Freddy's Revenge, New Line Cinema was unsure if it would continue with the series. Wes Craven, who wrote and directed the original A Nightmare on Elm Street, did not participate in the second film. He had not wanted the original to evolve into a franchise, but due to immense dissatisfaction with Freddy's Revenge, signed on to co‑write the screenplay for the third installment with the intention that it would end the series. However, the success of A Nightmare on Elm Street 3: Dream Warriors prompted a continuation of the series.
Reception
The film was released theatrically in the United States by New Line Cinema in February 1987. It was its first film to open nationally, opening in 1,343 theaters and debuting at number one, with a weekend gross of $8.9 million, a record for an independent film at the time. It made $44,793,222 at the domestic box office making it both the highest-grossing film for the studio that year and the 24th highest-grossing film of 1987. It is the third highest-grossing film of the Nightmare on Elm Street franchise after Freddy vs. Jason and A Nightmare on Elm Street 4: The Dream Master.
Legacy
Dream Warriors has been cited as an influence on subsequent horror films and television series. Director Josh Boone named it among the principal influences on The New Mutants (2020), alongside One Flew Over the Cuckoo's Nest and The Shining.
The film also influenced the Netflix horror series The Midnight Club (2022). Co-creator Leah Fong stated that Dream Warriors was screened at the first meeting of the series' writers' room and described it as "very influential" on the show.
Nancy: It's now or never. I'm not gonna kid you, this is as dangerous as it gets. If you die in this dream it's for real. Nobody has to go in that doesn't want to.