Compressor stalls and fire from the right engine noted by the Tower and Cabin Attendants during the takeoff roll and initial climb convince a B737-400 flight crew to return and land.

Narrative

On takeoff roll I called 'V1' and 'rotate'; the nose came off and we heard a loud bang; accompanied by vibration. We both later agreed that it felt like a blown tire. As the aircraft lifted off; we got a call from the tower saying they thought they saw flames on our right side. We saw that we still had an operating engine; but we were hearing multiple loud 'pops'; not as loud as the initial one; but continuing. Next; the EGT Warning light illuminated. I told the First Officer to keep flying and that I was pulling the #2 thrust lever back slightly. The EGT light went out; but the 'popping' noises; which we assumed were compressor stalls; continued. I finally answered repeated calls from the Flight Attendants who said that flames were coming from the #2 engine. We initiated the Eng limit/surge/stall/no response checklist. Once the thrust lever was at idle; indications were normal; and we verified with the Flight Attendants that no more flames were visible. We requested vectors back to the departure airport. After completion of the single engine descent and approach checklist; I assumed Pilot Flying duties and executed the approach. After a normal touchdown; we exited the runway; shut down #2 and requested Fire/Rescue to check us over and follow us to the gate where we discovered no visible damage. Dispatch and Maintenance were notified. Crew communication and performance were outstanding.