Leave it to Wes Craven to find a satisfyingly different, dark approach to Freddy, particularly after the series low of 'Freddy's Dead' (Krueger on a broomstick, anyone?).
The self referential, film within a film plot was clearly the jumping off point for Craven's more successful (in financial terms) Scream series, and at times it's played too straight for its own good, but by dragging Freddy into the real world while at the same time bringing back Heather Langenkamp and John Saxon, Craven successfully balances a new approach to the series as well as familiar characters and scenarios. But most importantly, by dispensing with the gags and reimagining Krueger's appearance, this is the first time since part 3 that Freddy has been even remotely scary. He's also effectively used, making only a few appearances during the films 110 minute duration, but his presence is felt throughout.
It doesn't all work. As noted previously, the films takes itself far too seriously, and is at times borderline pretentious. The scene in which Craven (as himself) reveals to Langenkamp that Freddy is an ancient evil that has been contained in the Elm Street series, like Pandora's Box, and has now escaped into the "real world" is poorly scripted to begin with, but Craven is of course no actor, and doesn't have the chops to make it even remotely believable.
These quibbles aside, it's still the strongest entry in the series since The Dream Warriors in 1987, and was a far more satisfying conclusion than the ill advised shenanigans of 'Freddy's Dead'!