The Sandman, a part of the army of evil, takes over the dreams of the residents of Sleepy Hollow. All of the residents affected were in some way involved with Abbie and Jenny when they originally saw the demon in the woods years earlier, and Abbie lied while her sister, Jenny, told the truth about their encounter.
As they investigate, it becomes apparent that in order to escape the Sandman, Abbie must come to terms with her guilt over lying about what she saw with her sister and make amends. She and Ichabod go into a dream state with the help of a local American Indian and a scorpion bite to fight off the Sandman and discover his secret.
When Abbie goes to see Jenny after she accepts the truth of their earlier encounter, she discovers her sister is missing from the institution.