Michael Paul Stephenson was a 10-year-old schoolboy when he was cast to star in a film called Goblins, which was being shot near his home in Utah. "As a child, I thought it was the best thing that ever happened to me," Stephenson remembers. "I was going to be a star - I was making the next Gremlins!"

The film never came to his nearest cinema. It went straight to video, and it wasn't called Goblins any more; it had become Troll 2, even though it contained no trolls and had no connection to the 1986 movie Troll. Stephenson first watched the film on videotape when he was 11. "Even though I was young, I was very aware that this was something different than a good movie," he says.

That's putting it mildly: Troll 2 is now hailed as one of the best bad films ever made. It has become a cult hit through fan parties and cinema screenings; for a long time it was No 1 on the IMdB's list of the worst 100 films.

The cult is poised to grow even larger thanks to Best Worst Movie, Stephenson's documentary about the Troll 2 phenomenon, which had its world premiere last month at the SXSW film conference and festival in Austin, Texas.

Why are so many people lining up to see a documentary about a bad film? Because the film really is spectacularly bad. Troll 2's plot follows an American family on holiday in a remote town called Nilbog (goblin spelled backward), where vegetarian goblins are trying to turn people into plants and eat them. Young Joshua Waits (Stephenson) saves the day with help from his dead grandfather and a baloney sandwich.

If the plot sounds dire, add terrible performances from first-time actors, a cheesy 80s soundtrack, low-budget latex masks and a sex scene in a popcorn-filled camper van. Then there's the dialogue. (Sample line: "I'm the victim of a nocturnal rapture. I have to release my lowest instincts with a woman.") But that can partly be explained by the fact that the creative team - Italian director Claudio Fragasso (working under the alias Drake Floyd) and his screenwriter wife Rosella Drudi - weren't native English speakers.

"It was the perfect maelstrom of events to create this unintentional comedy," Stephenson says. "Everyone wanted to make a good film and we failed. You can't replicate that."

Drudi, who is currently in Sicily preparing to shoot a new film with Fragasso, clarifies in an email interview that Troll 2 was "always intended ... to be a comic film" not a horror movie, as MGM tried to position it. "Perhaps the European irony is difficult for Americans to understand," she adds.

Ironic or not, the film now has legions of fans. Stephenson says: "About three and a half years ago, I started getting MySpace messages from Troll 2 fans telling me they loved the film. My first thought was, 'Is this a joke?'"

No joke. Fans had discovered the film through late-night cable TV airings and old VHS tapes passed from friend to friend, before the public screenings started. The film has now been shown everywhere from Los Angeles to the Green Zone in Iraq. Troll 2 has even had its own festival: the three-day Nilbog Invasion in Morgan, Utah in June 2008.

Fragasso still appears to be coming to terms with his film's new status. In Best Worst Movie, he seems heartened that US audiences have finally embraced Troll 2, before realising they are actually embracing the film's awfulness.

"I did a very good movie," Fragasso says, before somewhat half-heartedly adding: "Being considered the worst movie is almost as much a compliment as being considered the best. It means I've made an impression." Drudi confirms that she and Fragasso are actively planning Troll 3. She says the script will be "funnier, crazier and more ironic", and will pick up 20 years after the first film.

Will it happen? George Hardy, who starred as Joshua's father and is now a successful Alabama dentist, says he would love to act in the sequel. But he's not sure if Troll 2's unintentional magic can be recaptured. He asks: "How do you catch lightning in a bottle twice?"