Nightmare has two worlds. In the red-tinted "real world," players fight snakes and spiders while navigating standard platform challenges. The players here have a "sleep meter" that depletes with every hit taken. If the player's sleep meter drops to empty, the game transitions into the blue-tinted "dream world," where enemies take on the appearance of skeletons and ghosts. An invisible timer also starts, counting down until Freddy appears and forces the player into a brief boss battle. The sleep meter becomes a standard life gauge in the dream world, and deducts a life from the player if drained.

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