Five years have passed since Freddy Krueger was seemingly defeated and the Walshes have moved into the Thompsons' former home. The teenaged son Jesse has a nightmare about being stranded on a school bus with two girls being stalked by a violent killer, waking in terror and attributing the dream to the unusual heat in the room. He goes to school with his friend Lisa, who Jesse has a crush on but is too shy to make a move. After getting into a fight with a boy named Grady during gym, Coach Snider punishes them by making them stay after class and they casually become friends. Lisa comes to visit Jesse after school and they discover a diary from Nancy Thompson detailing nightmares she had that were strikingly similar to Jesse's. After various incidents and small fires happen around the house, culminating in their pet birds suddenly going insane and combusting, Jesse's father accuses him of sabbotaging things due to the rumors of murders in the area. Lisa takes Jesse to an abandoned factory where Fred Krueger worked, but they find nothing there.
The following night, Jesse has a nightmare encounter with Freddy Krueger who tells him to kill for him, as the dreams grow more intense, Jesse begins taking methods in order to stay awake, but that doesn't stop him from approaching his sister as she slept with a clawed glove on his hand. The experiences terrify him even further and he finds himself wandering the streets at night. Coming across a gay leather bar, Jesse is caught by Snider when ordering a drink and is made to run laps as detention at school. After sending Jesse to the showers, Snider is attacked by sporting equipment that comes to life in his office, he is bound by a jumprope and dragged to the showers and stripped. Jesse vanishes into the steam and Freddy emerges, killing Snider by slashing his back, leaving him hanging dead, much to Jesse's horror as he sees the glove on his hand. After being escorted home by police after wandering the streets naked, his parents begin to suspect that Jesse may be on drugs, or mentally disturbed. The following night, Jesse goes to a pool party hosted by Lisa and passionately makes out with her in the cabana. But his body begins to uncontrollably change on him, and in panic, Jesse leaves. Lisa's friend Carrie insists she go after him, but she decides to stay. Jesse goes to Grady's house and confesses to killing Snider, he tells Grady to watch him as he falls asleep and stop him if he tries to leave. Grady eventually falls asleep, and Jesse suddenly undergoes a painful transformation, Freddy emerging to Grady whose bedroom door jams. Freddy brutally stabs Grady to his bedroom door, killing him and Jesse is suddenly there, looking at Freddy's reflection in Grady's mirror. He flees before Grady's parents can get in.
Returning to Lisa's house, Jesse tells her what is going on. Lisa realizes that Jesse's terror is giving Freddy his strength, but he can't stop fearing him and transforms again, locking her parents in their bedroom, and making the pool outside start to boil. Freddy attacks Lisa, but realizes he can't harm her due to Jesse's influence and he escapes. The teens outside try to talk Freddy down as he taunts them and kills them, but they fail. Lisa's father emerges with a shotgun, but Lisa stops him from shooting Freddy who escapes in a ball of flame. She drives to the factory, facing sudden nightmares that she has to control her fear before confronting Freddy. She pleads to Jesse to fight Freddy, but his hold is too strong. Only when Lisa confesses her love for Jesse and kisses Freddy does he begin to fight back. Freddy combusts and turns to ash, leaving a distraught Lisa to watch, but after he dies, Jesse emerges from under the ashes and the two reunite.
Later, as Jesse, Lisa and Carrie are taking the bus from school, Jesse begins to notice similarities to his original nightmare and panics. After Lisa finally calms Jesse down, Carrie says it's "All over" before Freddy's clawed arm suddenly bursts through her stomach. Freddy's laughter is heard as the bus goes driving out into the field as in the first nightmare, and the screen goes dark.
- Mark Patton as Jesse Walsh
- Kim Myers as Lisa Webber
- Robert Englund as Freddy Krueger/Bus driver
- Robert Rusler as Ron Grady
- Clu Gulager as Ken Walsh
- Hope Lange as Cheryl Walsh
- Christie Clark as Angela Walsh
- Marshall Bell as Coach Schnedier
- Melinda O. Fee as Mrs. Webber
- Tom McFadden as Eddie Webber
- Sydney Walsh as Kerry
Nightmare series creator Wes Craven refused to work on this film because he never wanted or intended A Nightmare on Elm Street to become an ongoing franchise (and even wanted the first film to have a happy ending), and also because the movie changed the premise of the first film with Freddy deciding to attack people in the waking world, rather than avoiding this in favor of killing people in their dreams. Craven also said that he did not like the idea of Freddy manipulating the protagonist into committing the murders.
In 1985, the film opened in just 614 theaters, making $2.9 million in its opening weekend coming in 4th place. Domestically, the film has made $30 million, making it another huge success on a budget of only $3 million.
The film's critical reception was negative. Much of the criticism of Freddy's Revenge was aimed at the fact that the film, while continuing the storyline of its predecessor, takes on a completely different direction.
On Rotten Tomatoes, the film received mixed reviews with a rating of 42%.
Film commentators often remark on the film's perceived homoerotic theme. The argument is that a subtext exists about Jesse's alleged repressed homosexuality (never clarified in the movie), with the major examples pointed to being the encounter he has with his gym teacher in a gay S&M leather bar, and his fleeing to a male friend's house after an aborted attempt of making out at his girlfriend's pool party.
In a February 2010 interview with Attitude magazine, Robert Englund commented on this when asked whether he was aware about the camp, gay appeal of the series. He replied: "... the second Nightmare on Elm Street is obviously intended as a bisexual themed film. It was early '80s, pre-AIDS paranoia. Jesse's wrestling with whether to come out or not and his own sexual desires was manifested by Freddy. His friend is the object of his affection. That's all there in that film. We did it subtly but the casting of Mark Patton was intentional too, because Mark was out and had done Come Back to the Five and Dime, Jimmy Dean, Jimmy Dean."
In an article written by Brent Hartinger for After Elton, it is stated that a "frequent debate in gay pop culture circles is this: Just how 'gay' was 1985's A Nightmare on Elm Street 2: Freddy's Revenge (the first Elm Street sequel)? The imagery in the movie makes it seem unmistakably gay — but the filmmakers have all along denied that that was their intention." During his interview segment for the documentary Never Sleep Again: The Elm Street Legacy, screenwriter David Chaskin admitted that the homosexual themes were intentionally written into the script. The rest of the cast and crew stated that they were unaware of any such themes at the time they made the film, but that a series of creative decisions on the part of director Jack Sholder unintentionally brought Chaskin's themes to the forefront. In his interview, Sholder stated, "I simply didn't have the self-awareness to realize that any of this might be interpreted as gay", while "now-out actor" Mark Patton stated, "I don't think that [the character] Jesse was originally written as a gay character. I think it's something that happened along the line by serendipity.