the game features Ned as he travels through five different adventure portals into nightmare world such as The Graveyard, The Alcatraz Elementary School, The Medical Nightmare, The Attic, Basement and Beyond, and The Bathroom. You start at the Quilt, where you can choose from the 5 nightmare worlds. You only have 8 times to go to the Quilt, but there are secret passages in each portal that take you to another portal. There is one "shadow creature" for every world. Throughout these nightmares; by defeating creatures and completing small tasks, a small part of the shadow creature is revealed with 3 pieces for each. After each section is completed, the shadow creature becomes someone (or something) from reality who is connected with that issue. In the Graveyard Nightmare, the shadow creature turns into Ned's grandfather at the end, because Ned was worried about him dying. In the Medical Nightmare, the creature turns into a nurse named Dr. Klutzchnik. Ned was scared about getting sick and having to get a shot. In the Alcatraz Elementary School, the creature turns into Billy, a bully who just wanted to be friends with Ned. Ned simply wanted him to stop calling him "Melonhead". In the Attic, Basement and Beyond, the creature turns into a girl named Sally with a weird doll whom she calls "Sandy Patty Cake". She found it in the trash. Finally, in the Bathroom Nightmare, the creature turns into Ned's bathroom toilet who, in the nightmare, can talk. There are two endings to the game. The "bad" ending is when you use up all 8 "Quilt tries". Ned ends up still being scared of everything. The "good" ending is where Ned wakes up and isn't scared. As a result, the shadow creatures don't know what to do anymore.
Source: Wikipedia, "Nightmare Ned", available under the CC-BY-SA License.