It is the anniversary of when Lilo and Nani's parents passed away. They both feel very depressed, especially Lilo. She takes a nap to deal with her sadness while her sister goes for a long, silent walk to deal with her own sadness and, at the same time, tries to find a way to make Lilo and herself feel better. However, recently activated Experiment 276, designed to invade people's dreams and transform them into nightmares, shows up at their house. Jumba and Pleakley search the house, making sure nobody is asleep. They find Stitch awake, but find Lilo asleep, and witness 276 enter her dream. Jumba warns Pleakley not to wake Lilo, beause it turns out if she regains consciousness while 276 is still inside her dream, the experiment will remain inside her mind forever, turning all future dreams into nightmares. They thing they can do is enter Lilo's dream and capture 276 before she wakes up. To accomplish this, Jumba recommends using a failed nuclear powered spatula that he fashioned for Nani, which happens to work as a teleportation device, making it possible to transport beings into dreams.
Jumba, Pleakley, and Stitch gather together in Lilo's room with the spatula and a vacuum device for capturing 276. After giving everyone a word of caution about the dreamworld, Jumba activates the spatula which transports them into Lilo's dream. They find themselves in Lilo's room, and see nothing unusual to confirm they are inside her dream. But then they see Lilo walking on the ceiling and having a party with two zombies, confirming they are inside her dream. Suddenly, 276 starts to invade Lilo's dream by dissolving her zombies and her room. After the floor dissolves beneath their feet the four them fall through a black void before landing in the middle of a dream Kokaua Town. Walking around, they meet a crabby dream Mrs. Hasagawa who's head literally turns into a crab. Then they spot 276 flying around, dissolving everything in sight. The four of them try to capture him using the vacuum, but 276 jams the nozzle with a dream fire hydrant. Then he continues to dissolve the dream Kokaua Town to nothing but a black void. Lilo, Stitch, Jumba and Pleakley run till they reach a dead end. However, they spot a door on the other side of the void. Lilo is afraid of this door because bad things happen behind it. She wishes to stay behind, but Stitch insists on her coming. To get to the door, Lilo dreams up dental floss to use as rope. They all make to the door just as 276 completely dissolves the rest of Lilo's dream.
Lilo, Stitch, Jumba and Pleakley find themselves in Lilo's Hula School. In this dream, Lilo's hula classmates are all nice to her, all the experiments (even 627) are behaving and dancing with a dream Pleakley, a dream Jumba is flying above their heads in a tuxedo, and Lilo is president of the universe. Gantu and 625 are also in Lilo's dream. The four of them almost forget about Experiment 276 (until dream Jumba made the experiment's number), and because this is a good dream he is sure to invade it. Pretty soon, 276 shows up and starts turning Lilo's dream into a nightmare. He turns the dream experiments into bats and turns the dream Gantu and Lilo's classmates against her. Things get worse when Nani returns home from her walk and tries to wake up Lilo. Jumba sends Pleakley back to stop her, otherwise they will be trapped inside Lilo's dream forever.
Pleakley explains to Nani about the experiment in Lilo's dream, and that Stitch and Jumba are inside trying to capture it. Lilo is starting to slowly wake up, but Nani manages to put her back to sleep with a song their mother used to sing to them. Inside Lilo's dream, 276 has completely turned her dream into a nightmarish world where everyone is out to get her. Nani and Pleakley notice this too as she twists and turns in her bed. Then Nani notices their old family picture. She gives it to Pleakley and tells him to go back into her dream and give it to her. She believes it will help her overcome her miseries and possibly turn her nightmares back into dreams. Though reluctant, Pleakley teleport himself back into Lilo's dream. The four of them find themselves cornered by monster versions of Lilo's classmates and a giant Gantu. Pleakley remember the picture and gives it to Lilo. This helps her remember the happy times, which instantly turns the nightmarish surroundings into a peaceful dream of her with her sister and parents having a picnic on the beach. This defeat 276 and he is captured. Stitch, Jumba and Pleakley exit Lilo's dream with 276 just before she wakes up, feeling a lot happier than before.
Afterwards, Jumba gives 276 a reprogramming and finds his one true place as a virtual reality game at the local arcade. Meanwhile, Lilo, Stitch and Nani have a picnic on the beach with David.
- The manner in which Remmy was activated (a sea turtle checking on its nest, finding 276's pod, and throwing it into the water) was unusual, as sea turtles abandon their eggs right after they are laid.
- Melty appears to be taller than usual in the dream conga line.
- Moral: Dealing with death and loss is very tough to do on your own, so it's important to face reality with the help and support of loved ones.
- Hamlette was mentioned by Pleakley in this episode when he said, "Is that the one that turns everything into ham?"
- Gantu and Reuben appear only in Lilo's dream.
- This is the only episode where 627 is ever seen as good, despite that in his debut episode he is unable to be rehabilitated.
- This is the only time in the franchise where Lilo and Nani's parents "physically" appeared.
- Additionally, the Pelekai family photo shown in this episode is strangely undamaged. But it is slightly different from the one in the original movie's epilogue, as Mr. Pelekai isn't playing the ukulele at all. So it could possibly be a different photograph, while the damaged one is still on the wall.