Tomobiki-cho High School is preparing for the big school festival, with class 2-4 made up as a WWII-style cafe. Shutaro Mendo has even agreed to allow a Leopard tank of his family's to be placed into the room (though how it got put in there in the first place, noone can say). However, Ataru Moroboshi's lechery causes Lum to become angered, and her electrical energy ends up almost destroying the nearly-complete cafe.
Due to the intensive work to get the cafe ready by the school festival's opening day, the group stays overnight to finish work. Lum and Shinobu prepare tea, and meet with nurse Sakura. The conversation soon drifts to talk about the men in their lives, and Lum speaks of her wish to live happily ever after with Ataru (whom she refers to as Darling).
Mendo and Ataru meanwhile, have gone out to pick up food. On their way back to the school, they witness a strange street band out and about at such a late hour.
The next day, teacher Onnsen-Mark comes to work, looking disheveled. Sakura sends him home with some tranquilizers to allow him to sleep. Later on in the day, Sakura realizes she gave Onnsen-Mark laxatives instead, and rushes to his place to tell him. However, she instead finds him in his apartment, filled with dust and overgrowth as if it hasn't been inhabited for years.
Sakura takes Onnsen to a small cafe, where he explains that he feels like time is repeating itself. Sakura explains that he must be overworked, but soon, neither can recall what the day is. They then head back to the high school, where they eerily see the previous days' events play out in classroom 2-4.
Onnsen then orders the school to be vacated and sends everyone home. Almost everyone attempts to get home, but strangely, find their way barred or find themselves returned to the school.
Sakura attempts to call Onnsen at the school, but receives no response. She then takes a taxi, but soon comes into a strange conversation regarding time and space with the cab driver. Sakura suspects that there is more to this driver than meets the eye, but before she can react using her spirit scepter, a flash of light appears, and the driver appears to be normal.
With no way to go home, everyone convenes at the Moroboshi residence where Ataru and Lum are (who happen to be the only ones who made it home). It is here that Lum's cousin Ten also shows that he was given a strange little pig by an unknown person. The pic looks rather odd, and has a little tag around its neck with the letter "C."
The next day, strange things begin happening on the way to school. Ataru (unnoticed) sinks into a puddle of water, and pops up in the school swimming pool, along with Mendo's tank. Shinobu encounters a strange vision regarding wind chimes as well. That evening, the group decide to investigate the high school at night. However, their investigation reveals the school to now hve 4 stories (when it should only have 3), and gravity and space-time inside are inverted and turned around in all sorts of directions.
When the group finally makes it out of the school, Sakura is sure that if they attempt to try and go home again, they'll end up back at the school. Mendo directs them to a noodle shop with a secret garage in it's basement. in the garage is a Harrier Jump-jet, that the group takes off in. However, when they get a ways above the city, everyone is shocked to see that the province of Tomobiki-cho is on a circular disc on the back of a turtle, floating through space. The group also zooms in under the disc, noting that there are two giant statues holding it up on the turtle's back: one of Onnsen-Mark, the other of Sakurambo, Sakura's uncle (who she noted had seemed to disappear recently). Suddenly, the Harrier begins to lose fuel, and Mendo flies the plane back to the city. With fuel runnning out, Mendo sets the plane down in the closest area: right outside the residence of the Moroboshi's.
The story then cuts to some time later on (an exact time-frame is never given). Since then, the world around our group has fallen into disrepair. The Moroboshi's house has become the main residence for everyone. What is just as surprising, is that the house still functions properly, with water and heat...and in a strange instance, Mr Moroboshi even gets his daily paper!
A convenience store also has survived, and magically seems to never run out of food or items. Though it seems noone runs the store, the group still believes in leaving IOU's regarding their food purchases.
People deal with the end of the world in different ways. Shutaro has found his Leopard Tank, and spends his days driving around, firing its cannon. Sakura soon moves out on her own, and opens a small noodle shop. The father/son team of Mr Fujinami and Ryunnosuke reopen their Hama Tea Shop near the ruins of the school. The majority of everyone else spends their time just enjoying the atmosphere, as well as lazing about and eating.
One day, Shutaro stops by the ruins of a small gas station, and comes across a small water tap, that seems to yield nothing. Shortly thereafter, Shutaro watches as Lum appears, and tries the tap. Amazingly, it begins running cold water at full blast! Suspiciously, Shutaro asks Lum just what she thinks of the world around them, and she cheerily says that it's a fun place.
A couple days later, Shinobu and Ryunnosuke both go missing, but noone can find them. Shutaro gets a hunch, and with Sakura's help, goes over the lip of the platform holding the city up. He soon finds an enormous statue of Shinobu, in the same support position as they saw with Sakurambo and Onnsen-Mark. Sakura surmises that a statue looking like Ryunnosuke must be nearby. Sakura feels that of all the others in this world, she will be the next to disappear.
Later that evening, Sakura invites Ataru to meet her in the ruins of the old schoolhouse. Ataru shows up, but soon encounters Shutaro, who insists they talk. Shutaro then explains that he was using the firing of his tank's cannons to measure the circumference of the giant disc where the remnants of Tomobiki-cho reside. According to his measurements, the Moroboshi house is the exact center of this "universe."
Ataru eventually reveals what is on Shutaro and Sakura's mind: that they are basically living in a dream-world. Shutaro is angered at how Ataru can live in such a world knowing it is a lie, but Ataru claims that they don't even know whose dreamworld it is. Shutaro then plays a 'process of elimination' game, and gives his explanation as to whose world it is: Lum's.
Ataru doubts this, but Sakura also brings up the fact that they have not accounted for the person that made Lum's dream a reality. She then claims it is Ataru, who vehemently denies it, until Sakura explains that the Ataru she is talking to is a fake. The 'real Ataru' emerges from the shadows, and the 'false Ataru' is revealed to be a being named Mujaki, who is a dream demon.
Sakura quickly recounts that Mujaki has been said to have caused many of mankind's great downfalls through history. Mujaki explains that he feels he is considered a menace for no particular reason. He explains that he did create good dreams, but they all eventually become nightmares. In hopes to one day create a pure dream that would last, Mujaki's wish seemed to be granted when he encountered Lum at an aquarium one day. Mujaki notes that Lum appears sad, and they soon start talking. Mujaki explains his want to create good dreams, and offers to make Lum's dream come true. Lum then explained to Mujaki that her dream was to live 'happily ever after with Ataru and his friends.'
Shutaro and Sakura are then surprised to find themselves trapped in an alternate dimension, having been lulled into submission by Mujaki's story. Mujaki explains the story was true, and gloats that the dreams of those who have been trapped hold up the disc where the city is. Each of the people who has been turned into a giant stone statue gets their dream in return: Ryunnosuke (who is actually a girl) is recognized as a feminine figure, Shinobu eventually ends up with Shutaro, Onnsen-Mark has a relationship with Sakura, and Sakurambo is able to fulfill his enormous appetite.
However, Mujaki is so blinded into thinking he's taken care of almost all the loose ends, that he fails to realize he hasn't taken care of Ataru. Mujaki is about to, when Ataru proposes a deal (given that he has one of Sakura's spiritual scepters that could cause Mujaki harm), and Mujaki gives into Ataru's dreamworld of a woman-filled harem.
Mujaki thinks he's quelled Ataru, until Ataru notices that Lum is not a part of his harem, and demands she be included lest he wreck the dreamworld. Exasperated by this demand, Mujaki accidentally drops a horn that can call the dream-eating spirit named Baku. Ataru gives Mujaki one more chance to include Lum, but upon his refusal, Ataru blows the horn.
Unknown to the others, Baku is actually in disguise as the little piglet that Ten had found, and upon being summoned, begins to fly about the dreamscape, sucking it up and tearing it to pieces. Ataru is sucked up as well, but encounters Sakurambo, who strikes Ataru on the head to try and wake him up.
Ataru then awakes in Mendo's transport vehicle, thinking that he dozed off while he and Mendo went to pick-up food for the others at the school. However, it soon becomes apparent that this is a dream concocted by Mujaki, who it turns out is the vehicle's driver. Ataru manages to knock out Mujaki, but not before the vehicle crashes, throwing Ataru into a wrecking ball.
Ataru then wakes to find he's in the tag game that decided the fate of the world between him and Lum. Ataru is just about to win, when he suddenly remembers that his winning caused Lum to be brought into his life. When Ataru fails to win the tag game, the viewers on the sidelines come forward and pummel him to death.
Ataru next awakes in the victorian era, brought back to life as "Franken-Ataru." Ataru then encounters Mujaki, and the two attempt to kill the other, before both end up collapsing.
Ataru then awakes in a future where he and Lum had been frozen until a cure for an unknown disease was found for them. However, a technical malfunction hsa caused Lum to die several hundred years prior, and Ataru rushes out of the room yelling...only to realize that it was all a constructed set by Mujaki.
Mujaki then knocks Ataru out, and the two soon find themselves in a world of helixes spinning through a green space. Mujaki promises Ataru that if he will play by his rules, he'll make lots of good dreams for him.
As Ataru ponders this, a little girl in a white dress and large hat appears, and explains to Ataru that she knows how he can wake up. If he jumps off of his current resting place, and calls out the name of the one person he most wants to see, he'll wake up. Ataru claims that there are lots of women, but the little girl then reveals her face to be a youthful version of Lum, telling him to 'do the right thing.'
Ataru then plummets to Earth, calling out every single girl's name he can think of, but nothing works. At the last minute, he shouts out Lum's name, and lands in classroom 2-4, where everyone is still asleep...even himself.
Ataru wakes himself up, and Lum wakes up soon after claiming she had a wonderful dream. Ataru almost kisses Lum, until he turns and sees everyone watching. With all eyes on him, he refuses to do so, even though Lum insists that he can if he loves her. Ataru, trying to act macho and 'typical,' still refuses, causing Lum to zap him.
The film then ends with a couple workers commenting on Ataru and Lum never learning, and that they will continue their emotional games for the rest of their lives. A third worker is revealed to be Mujaki, who tells the audience that keeping up with Lum and Ataru takes more work than usual. The camera then pulls back as a sign hanging over the school entrance shows the title of the film.