In the near future, a device called the “DC Mini” allows the user to view people’s dreams. The head of the team working on this treatment, Doctor Atsuko Chiba, begins using the machine illegally to help psychiatric patients outside of the research facility, using her alter-ego “Paprika”, a persona she assumes in the dream world. Chiba’s closest allies are Doctor Toratarō Shima, the chief of the department, and Doctor Kōsaku Tokita, an obese, genius man-child and inventor of the DC Mini.

Paprika counsels Detective Toshimi Konakawa, who is plagued by a recurring dream. She gives Konakawa a card with the name of a website on it. Because they are unfinished prototypes, the DC Minis lack access restrictions, allowing anyone to enter another person’s dreams, which poses grave consequences when they are stolen. Shima goes on a nonsensical tirade and jumps through a window, nearly killing himself. Upon examining Shima’s dream, which is a parade of random objects, Tokita recognizes his assistant, Kei Himuro, which confirms their suspicion that the theft was an inside job.

After two other scientists fall victim to the DC Mini, the chairman of the company, Doctor Seijirō Inui, who was against the project to begin with, bans the use of the device. This fails to hinder the crazed parade, now in Himuro’s dream, which claims Tokita. Paprika and Shima find that Himuro is only an empty shell. The real culprit is Inui, who believes that he must protect dreams from mankind’s influence through dream therapy, with the help of Doctor Morio Osanai.

Paprika is captured by the pair after an exhausting chase. Osanai admits his love for Chiba and peels away Paprika’s skin to reveal Chiba underneath. However, he is interrupted by the outraged Inui who demands that they finish off Chiba; as the two share Osanai’s body, they battle for control. Konakawa enters the dream and flees with Chiba back into his own recurring dream. Osanai gives chase, which ends in Konakawa shooting Osanai to take control of the dream. The act kills Osanai’s physical body in the real world.

Dreams and reality begin to merge. The dream parade runs amok in the city, and reality starts to unravel. Shima is nearly killed by a giant Japanese doll, but is saved by Paprika, who has become separate from Chiba. Amidst the chaos, Tokita, in the form of a giant robot, eats Chiba and prepares to do the same to Paprika. A ghostly apparition of Chiba appears and reveals that she has been in love with Tokita and has been repressing these emotions. She comes to terms with her repressed desires, reconciling herself with the part of her that is Paprika. Inui returns in the form of a giant humanoid nightmare, reveals his twisted dreams of omnipotence, and threatens to darken the world with his delusions. Paprika throws herself into Tokita’s body. A baby emerges from the robotic shell and consumes Inui, aging into a fully-grown combination of Chiba and Paprika as she does so, then fades away, ending the nightmare.

In the final scene, Chiba sits at Tokita’s bedside as he wakes up. Later, Konakawa visits the website from Paprika’s card and receives a message from Paprika: “Atsuko will change her surname to Tokita…and I suggest watching the movie Dreaming Kids.” Konakawa enters a movie theatre and purchases a ticket for Dreaming Kids.