Excluding the first, this is definitely the best Freddy sequel. It is lighter hearted than the first two, but it doesn't let Freddy's wise-cracking antics get over the top.
The story concerns a group of teenagers who are all patients at an asylum. Later on we also learn that they are the last children left of the parents who murdered Freddy. Basically the film is about him (Freddy) picking all of them off one by one.
This is the one that really paves the way for Freddy's character to cease to be dark and become quite funny. He's not in the shadows no more and he's starting to pull jokes rather than snarl. You would think that this would put the film in quite a negative light, but it doesn't. This factor makes the film more fun. Sure, it's got a few scary moments but it's also jam-packed with humour.
The acting is actually quite good, too. Much better than the first two. I know that not many people watch slasher films for the acting, but if it's good it does help greatly. Also, unlike other horror movies, you actually care for these teenagers and especially the Doctor who's in charge of them all. That's why you feel a little sorry for them when they bite the dust.
And talking of the deaths, they'll all great. Like Freddy's character, this is the one that paved the way for the deaths to become a little more elaborate. The 'puppet' death, the 'T.V.' death. They'll all great.
Also, like its predecessors, this film is full of good imagery. Freddy transforming into a giant worm, a moving skeleton. Visually the film is quite good.
So, if you've heard loads of negative comments about the Freddy films, I'm sure this entry will change your mind.