As Natalie Simon (Alicia Witt) is visibly shaken by Michelle's death (she is seen looking at high school yearbook pictures of her and Michelle), Damon Brooks (Joshua Jackson) offers to talk and the two drive into the woods. Natalie reveals that she was friends with the victim but hadn't spoken to her in years. Damon tries to seduce her via a fake story about a deceased girlfriend but is repelled. He then is attacked by the killer, who hangs him from a tree with the rope attached to the car. As the killer approaches Natalie, she attempts to run him over, strangling Damon in the process. Damon's corpse falls onto the windshield and Natalie flees into the woods, screaming.
The next day, no trace of the incident is left and no one believes Natalie's story due to Damon's penchant for pranks and tricks. Realizing both Damon's death and Michelle's murder closely resemble famous urban legends, Natalie goes to the library to read up on urban legends. While she is away, her goth roommate Tosh Guaneri (Danielle Harris), is attacked and strangled by the killer. Thinking her roommate is merely engaging in rough sex, the returning Natalie doesn't turn on the lights and goes to bed. In the morning, a shocked Natalie discovers her corpse and the words, "Aren't you glad you didn't turn on the light?" scrawled on the wall. Due to the fact that Tosh was a manic-depressive, school officials conclude that Tosh committed suicide.
Trying to find out more about the supposed Stanley Hall massacre, Natalie and Paul break into Prof. Wexler's (Robert Englund) office. They find, among other things, a fur-lined coat and an axe. Wexler surprises them and takes them to the dean, where they voice their suspicions that Wexler is the killer. The dean admonishes them, bringing up a suspended sentence from Natalie's past and announces Paul to be fired from the newspaper. After trying to save Brenda from a supposed attack in the swimming hall, Natalie reveals her past with Michelle: One night Natalie and Michelle re-enact another urban legend: they were driving with their headlights turned off and pursued the first driver to flash them, causing him to run off the road and die in the crash. Natalie and Michelle got off with a suspended sentence and probation for reckless endangerment, but the incident still haunts Natalie. Brenda suggests that she should keep her mind off of these things by attending a party.
As the weekend approaches, the dean is attacked in the garage and run over by his car forcing the emergency spikes into his back. Later on, security guard Reese Wilson (Loretta Devine), finds Wexler's office empty and smeared in blood. In the meantime, Paul has discovered that the Stanley Hall massacre actually occurred and that Wexler was the sole survivor. At the party, he informs Natalie of his findings and concludes that Wexler, haunted by the memory of the massacres, has now himself turned into a killer. Paul apologizes to Natalie and kisses her, which enrages Brenda, who has a crush on Paul.
Parker refuses Paul's suggestion to stop the party because there is a killer on the loose. Parker gets a phone call from the killer telling him that he/she has Paul's dog in the microwave to dry him. He is then lured into the toilet, where the killer attacks him and forces him to chug bathroom chemicals. Back at the radio station, Sasha is talking to a woman when she is cut off by the supposed storm. In the background, her employee is being strangled to death. Sasha looks through the glass to see the killer smash the glass. Sasha screams and runs out of the room; the plus is that she is still on air and everyone can hear her cries for help. Not everyone believes she's in trouble besides Natalie, who runs through the rain to save her. After a brief chase around the campus, Sasha goes back to the radio station to see Natalie enter the building. Natalie warns Sasha that the killer is behind her, but she's killed.
Fleeing from the station, Natalie finds Brenda and Paul, and they drive off to find help. Paul convinces the girls that the killer is Wexler. When Paul stops at a gas station, Natalie and Brenda discover Wexler's dead body in the car and bolt, thinking Paul to be the killer. Natalie loses Brenda but makes her way to a road, where the school's janitor picks her up. When the janitor flashes a car with its lights out, it swerves around and pursues them. The janitor's car is forced off the road but Natalie survives and makes her way towards Stanley Hall. She hears Brenda screaming from inside, presumably held captive by the killer. When Natalie breaks into the hall, she discovers Brenda lying on a bed. As Natalie starts crying, Brenda sits up and knocks her unconscious.
Waking up, Natalie finds herself tied to a bed. The killer comes in and unmasks herself as Brenda. She reveals that the young man Natalie and Michelle killed was Brenda's boyfriend and she is now exacting her revenge by killing Natalie's friends. She begins to cut Natalie's stomach in the fashion of the "Kidney Heist" legend, when Reese rushes in, drives away Brenda and frees Natalie but is first stabbed and then shot by the Brenda. Brenda threatens to shoot Natalie, revealing her estimation that after Natalie's death she would get together with a heart-broken Paul. Suddenly, Paul appears and tries to trick Brenda. As Brenda is deciding whether to shoot Paul or Natalie, the wounded Reese reaches up and shoots Brenda. Natalie grabs the gun and shoots Brenda, who falls through a window.
Natalie and Paul drive off to get help for Reese and wonder how the events will in turn themselves become an urban legend. Suddenly, Brenda appears in the backseat and attacks them with the axe. Paul crashes on a bridge, sending Brenda through the windshield into the river below. Some time later, the whole story is told among another group of students. The other students disbelieve the tale with the exception of one young woman, who is revealed to be Brenda, alive and well, setting out to give her version of the story. The film ends on Brenda telling the group "how the story really goes."