Knife of Dreams focuses primarily on Matt, Rand, Perrin, Elayne and Egwene. Throughout all of the story lines, it is revealed that signs, such as the rapid spoilage of food, the increase in rats and other vermin and strange sightings, like the dead walking indicate that Tarmon Gai’don is drawing close.
Matt begins the novel, still on the road with Thom Merrilin, Tuon and the rest of his party traveling into Altara with the menegrie. While on the journey, Thom reveals the contents of the letter Moiraine had written to him before her confrontation with Lanfear. The letter revealed that Moiraine is being held prisoner by the Aelfinn and Eelfinn and that there is a chance she could be rescued, but it will be a dangerous attempt that Matt must be involved in for their to be any chance. Matt is reluctant to get involved, particularly since he has come to believe that the Aelfinn may be inside his head already, but he agrees. Matt’s companion Noal also volunteers to join them in their attempt, which appears to involve the strange tower Perrin encountered during his confrontation with Slayer in the Wolf Dream.
Matt also learns that there is a Seanchan plot to murder Tuon, which Tuon assumes may be the work of one of her siblings. Matt determines that they must leave the protection of the menagerie and flee Altara, but after meeting up with Talmanes and the Band of the Red Hand, Matt learns the Seanchan have the pass through the mountains he intended to use to escape blocked. Aided by a new crossbow design one of the inventors at Rand’s school created and Aludra’s weaponized fireworks, Matt and the Band launch a successful guerilla campaign against the Seanchan, drawing the Seanchan out of the pass. However, Matt’s plans are shifted when he encounters a contingent of Deathwatch Guards looking for Tuon. Tuon convinces Matt that the guards, lead by Furyk Karede are loyal to Tuon and with Karede’s help Matt defeats the Seanchan forces sent to kill Tuon. Before departing with Karede to return to Ebou Dar and deal with Suroth, Tuon says the words that make Matt her husband and the Seanchan’s new Prince of Ravens. The pair acknowledges that they may be forced to face each other on the field of battle, though Matt has come to love Tuon.
Tuon discovers that civil war has broken out in Seandar and all of the imperial family, save herself, has been killed, leaving Tuon as the new Empress. Tuon arrives in Ebou Dar and confronts the darkfriend Suroth, who had been scheming to supplant Tuon as the new Empress. Tuon declares that Suroth is to be punished and then sold as a slave.
Rand’s story continued with his plans to meet with the Daughter of the Nine Moons and arrange a truce, so that with Tarmon Gaidon approaching, his forces would not be split between fighting the Dark One and fighting the Seanchan. However, before he could reach the meeting, Rand was forced to deal with a massive attack by Trollocs and Myrddraal. During the attack, Lews Therin was able to seize control of Saidin, which was initially helpful, since he was able to use advanced techniques with the Power to combat the Trollocs, which were able to be adapted by Logain and the other Asha’man to slaughter the Trollocs, but turned to near disaster, when Lews Therin attempted to kill Rand and himself by drawing too much of the power. Rand was able to convince Lews Therin to cease his attempts until Tarmon Gai’don was over, where Rand promised Lews Therin they would both die.
Rand then proceeded on to his meeting with the Daughter of the Nine Moons, only to find the meeting had been arranged by Semirhage, disguising herself as a Seanchan high lady. Semirhage’s disguise failed before she was able to spring her trap, but she launched an attack against Rand that he was unable to counter due to fighting with Lews Therin for control of the Power, resulting in Rand being seriously injured and losing his left hand. In spite of Rand’s injury, Nynaeve, Cadsuane and their companions were able to defeat and capture Semirhage. Semirhage claims that Graendal had revealed that Rand was afflicted with a madness that allowed him to communicate with Lews Therin, but would ultimately result in his death. In spite of the loss of his hand and the disturbing news, Rand further hardened himself to face the coming battle.
Perrin determines that in order to defeat the Shaido and rescue Faile, he must make an alliance with the Seanchan, which he sees as a “deal with the Dark One.” Perrin makes an alliance with a band of Seanchan led by Tylee Khirgan. He agrees to allow the Seanchan to collar all of the Shaido Wise Ones as damane as part of the deal for their help. In order to neutralize the Shaido Wise One’s channeling, Perrin acquires a large quantity of forkroot tea from the Seanchan, which he puts in the water supply of the town where the Shaido are camped. Perrin also recruits the help of Tam Al’Thor and a large contigent of bowmen from the Two Rivers. Using the Asha’man’s ability to travel and shroud their attack in fog, Perrin and his allies launch a sneak attack on the Shaido. With only a few of the Shaido Wise One’s able to channel, Perrin’s Wise One allies, Asha’man and the Seanchan damane are able to protect Perrin’s forces from attack by the One Power, while his allies decimate the Shaido forces. The attack also had the side benefit of destroying a large number of Masema’s forces, though Masema himself survived.
During the course of the battle, Aram, the former Tinker and Perrin’s companion, who had been convinced by Masema that Perrin’s yellow eyes were proof that he is a darkfriend, attacked and attempted to kill Perrin, however his attempt failed and Aram was killed. Meanwhile, Faile and her companions were attempting to make good on Galina’s promise to help them escape, if they provided her with the rod ter’angreal Therava was using to control Galina. However, Galina betrayed them and left them for dead, trapped under a collapsed building. After failing to shift the debris so they could escape, Faile convinced Morgase to use her small ability with the One Power to manipulate the red scarf Galina had marked their meeting location with, in the hopes that someone would see it and realize they were trapped in the building. Fortunately for Faile, one of their supporters in the camp spotted the scarf and went to get help. Rolan, a Shaido warrior who had taken a romantic interest in Faile, and several of his companions were able to dig Faile and her companions out of the rubble and attempt to sneak them out of the camp. However, when they encountered Perrin in the middle of the battle, not knowing they were on the same side, the pair fought and Perrin killed Rolan and his companions. Faile was upset over Rolan and his companions death, but chose not to reveal to Perrin that they had been helping her escape.
Sevanna was captured and taken prisoner by the Seanchan, leaving Therava to lead the surviving Shaido. Therava re-captured Galina and took her prisoner once again, and revealed that she intended to lead the Shaido back to the A’iel waste, where they would never leave again.
Egwene, who was still a prisoner in the White Tower, managed to resist being broken, in spite of being beaten several times each day, and began a campaign to spread the notion that Elaida was not fit to be Amyrlin through the tower. Though Egwene was able to communicate with the rebel Aes Sedai in the world of dreams, she forbade them from attempting to rescue her, since she planned to pull Elaida down from inside the tower. Egwene’s smear campaign appeared to be working and she even managed to attain allies amongst the novices in the Tower. Meanwhile, in the rebel camp, the rebels reached an agreement with Rand to allow them to bond a number of Asha’man to equal the number of sisters the Asha’man had bonded. They also discovered, through the revelation of the Asha’man ambassador, that Halima had been one of the male Forsaken, posing as a woman and was the person responsible for the murders in the rebel camp, but not before Halima managed to escape.
Pregnant with Rand’s twins, Elayne is still embroiled in her quest to gain the throne of Andor. The Wise Ones having decided that Aviendha needed to return to her own people to continue her training, took Aviendha and departed Camelyn. Before leaving, Aviendha gave Elayne a knife ter’angreal, that Aviendha, who had discovered she had a talent for identifying the use of ter’angreal, said would hide Elayne from Shadowspawn. Facing overwhelming odds and a betrayal by some of her mercenary hires, Elayne’s bid for the throne looks bleak and her situation becomes even more dire, when an attempt to root out some Black Ajah sisters and their darkfriend companions backfires, resulting the deaths of Vandene and two other Aes Sedai, one of which was revealed to be the woman who had killed Adeleas and possibly several members of the Kin. However, Birgette was able to manipulate the Seafolk Windfinders into helping her and a contigent of soliders and guards defeat and capture the Black Sisters and rescue Elayne. Elayne then parlayed their presense outside the walls of Camelyn into a risky opportunity to take her opponent’s for the throne’s forces by surprise and defeat them. As a result, Elayne was able to gain the support of enough houses to claim the throne of Andor.
In other minor story lines, Loial marries Erith and agrees to address the Great Stump, hoping to secure the aid of the Ogier in Tarmon Gai’don. Rand asked Loial to close all of the Waygates, but due to his plans to address the Stump, Eldar Haman agreed to close the Waygates in Loials place.
Lan convinces Nynaeve that he needs to ride to the blight border to take up the fight against the Shadow, since the Borderlanders have inexplicably taken their army south. Nynaeve tricks Lan into promising that he will not go into the Blight until he reaches Fal Dara and that he will accept the help of any men who offer it along the way. She then opens a gateway to World’s End in Saldea, forcing Lan to ride hundreds of miles to keep his promise and then Travels ahead of him to recruit his Malkieri countrymen to aid him in his battle.
Believing that he killed his stepmother Morgase, Galad confronts and then kills Eamon Valda and is named the leader of the Whitecloaks. Galad pledges the Whitecloaks to battle the Dark One at Tarmon Gai’don.
Finally, as the novel concludes, the Red sisters, sent to the Black Tower by Elaida to bond Asha’man, reach an agreement with Mazram Taim to allow them to bond a number of Asha’man equal to the sisters bonded against their will by the Asha’man. When they express their surprise at Taim’s rapid agreement, he responds with the phrase, “Let the Lord of Chaos Rule,” which was the instruction given to the Forsaken early on in the series.