Five years after Freddy Krueger's apparent defeat, the Walshes have moved into the Thompsons' former home. Their teenage son, Jesse, has a nightmare about being stalked by a killer on a school bus. He wakes up and attributes the dream to the unusual heat in the room. Jesse goes to school with his friend Lisa, whom he is interested in romantically, but is too shy to flirt with her. After getting into a fight with a boy named Grady during gym class, Coach Schneider makes them stay after class and they become friends. Lisa comes to visit Jesse after school and they discover a diary from Nancy Thompson detailing her nightmares, which are strikingly similar to Jesse's. Small fires happen around the house, which culminates in the spontaneous combustion of their pet birds. Jesse's father accuses him of sabotage.
The following night, Jesse has a nightmare where he encounters Freddy, who tells Jesse to kill for him. The dreams grow more intense and Jesse unsuccessfully attempts different measures to keep himself awake. He eventually begins wandering the streets at night. One night, Jesse is caught by Schneider when ordering a drink and is made to run laps at school as punishment. After sending Jesse to the showers, Schneider is attacked by an unseen force that drags him to the showers. Jesse vanishes into the steam and Freddy emerges, killing Schneider by slashing his back. Later, Jesse is horrified to see the glove on his hand. He is escorted home by police after being found wandering the streets naked, and his parents begin to suspect that Jesse may be on drugs or mentally disturbed. Lisa takes Jesse to an abandoned factory where Fred Krueger worked, but they find nothing there.
The following night, Jesse goes to Lisa's pool party and kisses her in the cabana. Afterwards, his body begins to change and he leaves in a panic. He goes to Grady's house, confesses to killing Schneider, and instructs Grady to watch him as he sleeps and to stop him if he tries to leave. When Grady eventually falls asleep, Freddy emerges from Jesse's body and kills Grady. Freddy then changes back to Jesse, who finds himself looking at Freddy's reflection in Grady's mirror. He flees before Grady's parents enter the room.
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 cannot stop fearing him and transforms again. He locks her parents in their bedroom and attacks Lisa, but realizes he cannot harm her due to Jesse's influence. He goes outside, where he begins to slaughter the partygoers. 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 and having to control her fear before confronting Freddy. She pleads with Jesse to fight Freddy, but Freddy's hold is too strong. When Lisa confesses her love for Jesse and kisses Freddy, Jesse begins to fight back. Freddy combusts and turns to ash, from which Jesse emerges.
Later, as Jesse, Lisa, and Lisa's friend Kerry are taking the bus to school, Jesse begins to notice similarities to his original nightmare and panics. After Lisa calms Jesse down, Kerry says that it is all over just before Freddy's clawed arm bursts through her chest. Freddy laughs as the bus drives into the field, just as in Jesse's first nightmare.The film was a seven-week production in the Los Angeles area for an approximate budget of $3 million.
Kevin Yagher handled Robert Englund's make-up transformation into Freddy, an application which took three hours. Nine sections were used on Freddy's burnt face, with Yeager stating he made the make-up less bulky than in the original film in order to allow more facial movement.
This was the screenwriting debut for 31-year-old David Chaskin, who attempted to mix humor into the film. New Line asked for a script, and 3 days later he provided 15 pages, which led to him getting the job. After 10 weeks, three drafts and a polished script had been finished. Chaskin believed that a third Elm Street film should be a prequel, explaining Freddy's childhood.
In 1985, the film opened in 614 theaters, making $2.9 million in its opening weekend, coming in fourth place. In the US, the film made $30 million on a budget of $3 million.
Critical reaction of the film was initially positive but was met with some criticism. Janet Maslin of The New York Times praised the film, stating that the film has "clever special effects, a good leading performance and a villain so chatty he practically makes this a human-interest story." The review also gave the lead performances positive reviews, noting "Mr. Patton and Miss Myers make likable teen-age heroes, and Mr. Englund actually turns Freddy into a welcome presence. Clu Gulager and Hope Lange have some good moments as Jesse's parents, and Marshall Bell scowls ferociously as the coach who calls his charges dirtballs and who is eventually attacked by a demonic towel." Variety gave a positive review, saying "Episodic treatment is punched up by an imaginative series of special effects. The standout is a grisly chest-burster setpiece." In a negative review, People called the film a "tedious, humorless mess."
The film currently holds a 40% approval rating on Rotten Tomatoes, based on 24 reviews.
Film commentators have often remarked on the film's perceived homoerotic theme, suggesting its subtext suggests Jesse is a repressed homosexual (never clarified in the movie). They note in particular the scenes where he encounters his gym teacher at a gay bar, and his flight to a male friend's house after he attempts to make out with his girlfriend at her pool party. Further, actor Mark Patton, who plays Jesse, played a role so often written as female in the subgenre (such as in the first film) that it has become known as the "final girl." At the time of its release, one publication referred to it as "the gayest horror film ever". In the 21st century, it has become a cult film for gay audiences.
Patton has claimed the film's gay subtext was increased through script rewrites as production progressed. "It just became undeniable," he told BuzzFeed in 2016. "I'm lying in bed and I'm a pietà and the candles are dripping and they're bending like phalluses and white wax is dripping all over. It's like I'm the center of a ... bukkake video." He has felt betrayed since he knew the filmmakers were aware he was gay, but closeted, and thus had considerable leverage over him in having him perform a role that, combined with his performance as a gay teen in Come Back to the Five and Dime, Jimmy Dean, Jimmy Dean the year before, led to him being typecast as gay, which called attention to what he was trying to avoid discussing and would have forestalled him getting any significant roles in 1980s Hollywood.
In particular, Patton blames Chaskin, who he says claimed the subtext arose from how Patton played the part. "I love when [he] uses the word 'subtext,'" he complained. "Did you actually go to a freshman English course in high school? This is not subtext." In 2016 he said Chaskin "sabotage[d]" him. "Nobody ever affected my confidence—the boys that threw rocks at me, nobody—but this man did." At one point he claims Chaskin told a reporter that Patton had played the part "too gay." The emotional stress of the film led him to leave acting shortly afterwards for a career in interior decorating.
While Chaskin has tried to reach out and apologize to Patton over the years, with limited success, he maintains that Patton's "interpretations of Jesse were choices that he made ... I have to believe that he 'got it' and that was how he decided to play it." After denying for years that there was a gay subtext to the film, in the 2010s he admitted it was a deliberate choice on his part. "Homophobia was skyrocketing and I began to think about our core audience—adolescent boys—and how all of this stuff might be trickling down into their psyches," he explained. "My thought was that tapping into that angst would give an extra edge to the horror."
One scene that would have made the gay subtext more apparent, however, was toned down. Englund was actually prepared to insert one of his hand's knife blades into Jessie's mouth instead of merely caressing his lips with it as he does in the finished film, but Patton did not feel comfortable with it. The film's makeup artist recommended to Patton that he not do the scene that way in order to protect his image.
In a February 2010 interview with Attitude magazine, Englund said "... 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, David Chaskin admitted that the gay themes were intentional, which he had denied up until that point.
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." Patton also wrote Jesse's Lost Journal about Jesse's life after the film and dealing with his homosexuality.
The film's score was composed by Christopher Young. The song "Have You Ever Seen a Dream Walking" performed by Bing Crosby plays over the film's end credits.