The Dream Demons are three malevolent demonic entities, vaguely resembling floating, skeletal snakes in appearance. Their primary goal being breaking down the barriers between the Dream World and the real world the Dream Demons seek out depraved humans to act as their agents in spreading chaos. The Dream Demon animatronics were created by Jim Fowler and manipulated by a team consisting of him, John Agnew, Bret Alexander, Adam DeFelice, Jennifer Howard and F. Lee Stone.
When prolific child murderer Freddy Krueger was burned to death by a vengeful mob of Springwood citizens for getting away with the crimes he had committed the Dream Demons appeared before him and granted him the ability to enter and kill in dreams, provided he had ample fear to use as a power source. Whenever a would-be victim defeated Freddy the Dream Demons would resurrect him to continue his work.
When Freddy's long-lost daughter Doctor Maggie Burroughs forcibly enters her father's mind the Dream Demons appear to taunt her before she finds the portion of her father's mind containing his memories. When Maggie forcibly drags her father drags her father into the real world and blows him up with a pipe bomb the Dream Demons are violently expelled from their servant's remains. Though it never explicitly shown or stated that the Dream Demons found their way back to Freddy after this defeat, they presumably did.