On October 30, 1988, Michael Myers, who has been in a comatose state for ten years since the explosion at Haddonfield Memorial Hospital, is transferred to Smith's Grove Sanitarium by ambulance from his current residence in the Ridgemont Federal Sanitarium. Upon hearing that he has a niece, Michael awakens and kills the ambulance personnel, which causes the ambulance to lose control then crash into a river. Michael escapes and makes his way to Haddonfield. Michael's former psychiatrist, Samuel Loomis, learns of Michael's escape and gives chase. He follows Michael to a gas station and eatery, where he has killed a mechanic for his clothes, along with a female clerk. Michael then escapes in a tow truck hitting the gas pumps causing an explosion, destroying Loomis's car provided by Ridgemont in the process and disabling the phone lines. Loomis is then forced to catch a ride to Haddonfield to continue pursuing Michael.
Meanwhile, Jamie Lloyd, Laurie Strode's daughter and Michael's niece, is living in Haddonfield with her foster family, Richard and Darlene Carruthers, and their teenage daughter, Rachel. Although Jamie knows about Michael, she does not realize he is the man she has nightmares about. On Halloween night, Richard and Darlene head out to a party and leave Rachel to babysit, which forces her to cancel a date with her boyfriend Brady. After school, Rachel takes Jamie to buy ice cream and a Halloween costume. Michael arrives in Haddonfield and steals a mask from the same store where Jamie and Rachel happen to be; he almost attacks the former, but is forced to flee when Jamie screams and alerts Rachel.
That night, as Rachel takes Jamie trick-or-treating, Michael breaks into the house and find photos of Laurie in Jamie's bedroom. Then he goes to the power station and kills a worker by throwing him into a transformer, plunging the town into darkness. Meanwhile, Loomis arrives in Haddonfield and warns the new sheriff Ben Meeker that Michael has returned. Michael attacks the police station and kills all of the officers. A lynch mob is formed by the town's men to kill Michael once Loomis reveals Michael has returned. Rachel discovers Brady cheating on her with her friend and Meeker's daughter Kelly, and loses track of Jamie. After being chased by Michael, Rachel finds Jamie.
Sheriff Meeker and Loomis arrive and take the girls to the sheriff's house with Brady, Kelly, and a deputy. They barricade the house, and Loomis departs to look for Michael. With Sheriff Meeker in the basement awaiting the arrival of the state police before heading out to deal with the lynch mob, Michael sneaks in and kills the deputy and Kelly. Discovering the bodies, Rachel, Jamie, and Brady realize they are trapped in the house. Rachel and Jamie flee to the attic when Michael appears, but Brady stays to fend him off and is killed when Michael crushes his skull. The girls climb through a window onto the roof and Jamie is lowered down safely, but Michael attacks Rachel and knocks her off the roof and knocks her unconscious.
Pursued by Michael, Jamie runs down the street and finds Loomis. They take shelter in the school, but Michael appears and subdues Loomis by throwing him through a glass door, then chases Jamie through the building. Jamie trips and falls down a flight of stairs. Before Michael can kill her, Rachel reappears and subdues him with a fire extinguisher, then vanishes. The lynch mob arrives at the school after hearing the alarm go off. Earl and three other mob members agree to take the girls to the next town in a pickup truck, meeting up with the state police as they head for Haddonfield to reinforce Sheriff Meeker.
A trooper tells them of a substation just up the road where they will be safe, but Michael, who's been underneath the truck, climbs aboard and kills all three men. Including Earl when he smashes his hand through the driver side window. Rachel pushes Earls body out to take the wheel, continuously attempting to throw Michael off. She succeeds in doing so and then rams him with the truck, sending him flying into a ditch near an abandoned mine. Sheriff Meeker, Loomis, the rest of the lynch mob, and the state police arrive, but when Jamie approaches Michael and touches his hand, he rises. Meeker, the state police, and the lynch mob relentlessly shoot Michael until he falls down the mine.
Loomis and Sheriff Meeker take the girls back home where Darlene and Richard console their traumatized children. As Darlene goes upstairs to run a bath for Jamie, she is suddenly attacked. When Loomis goes to see what happened, he finds an emotionless Jamie holding a pair of bloody scissors on the top of the stairs, reminiscent of Michael when he killed his own sister. Loomis screams "No!" repeatedly and attempts to shoot Jamie, but Sheriff Meeker stops him. Loomis sinks to the floor and begins sobbing, as Rachel, Richard, and Meeker stare in horror.
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