Haven't seen this movie since I was a kid--it's funny how as a teenager I had a lingering fear of weight lifting because of this film. It has several truly extraordinary sequences in it (Freddy's death in this film [don't act surprised, in these 80's franchises the bad guy died every time at the end and then was resurrected at the beginning of the next] elicited several squeals from the living room audience--myself included). The characters seem less wooden and the dialogue more natural. It's an all around improvement.
Once again we have a protagonist directly responsible for the deaths of their close friends, but as opposed to Part 2 where the main character IS the one doing the killing, the main character in this one is sort of the lure. And all the killing is done in dreams. It's silly how such a small detail can make such a big difference, but you as the audience WANT Freddy to ultimately be the bad guy and when dealing with a story as straightforward as these can be having moral ambiguity isn't interesting but simply detracting and confusing.
Maybe not as good a sequel as Dream Warriors or The New Nightmare, but certainly a very worthy entry in the series.