A traveling carnival, owned by the down-and-out Uncle Ned and his nephew Larry, finds itself in dire financial straits and in danger of being shut down. During one of their stops, the carnival's haunted house attraction becomes home to a group of small, grotesque creatures known as Ghoulies, which accidentally get released from a mysterious glowing barrel. These mischievous creatures begin causing havoc within the attraction, initially scaring and intriguing visitors, leading to a sudden increase in the carnival's popularity. Larry, along with the dwarf performer Sir Nigel, unknowingly protects the sinister little beings hoping the new popularity will save their livelihoods.

As the Ghoulies continue their chaos, things start to spiral out of control. Their malevolent antics lead to bigger problems than anyone in the carnival could have anticipated. A skeptical law enforcement officer begins investigating the string of bizarre incidents connected to the carnival, while tensions escalate among the carnival workers who are completely unaware of the true nature of the creatures. With the carnival’s future hanging in the balance, Larry and his friends must figure out what’s behind these strange occurrences before everything they’ve worked for is destroyed.