A young man's failure to follow proper care instructions for his new pet leads to a town being overrun by tiny monsters.
Rand Peltzer follows Chinese Boy to Chinese Boy's Grandfather's shop in Chinatown. Rand walks around the store before approaching Grandfather and trying to sell him his invention called the Bathroom Buddy. He hears a noise and walks over to a crate holding Gizmo, who is a Mogwai. Rand offers to buy Gizmo for 200 dollars, but the Grandfather tells him that he is not for sale. The Chinese Boy tells Rand to wait outside and then brings out Gizmo and sells him to Rand after telling him the three rules to follow in Gizmo's care. Keep him out of the light as it kills him, keep him away from water and don't feed him after midnight.
In Kingston Falls, a Little Girl is hit with a snowball by Simon and she joins in the snowball fight. Sheriff Frank goes to Fountains X-Mas trees where Pete works and tries to scam a free Christmas tree from Pete's Father. Mr. Anderson who is buying a tree tells Sheriff Frank that he bought his tree instead of trying to get a free one. Billy is looking at his VW Beetle that is smoking from the engine when Mr. Futterman drives up in his International Harvester plow. Mr. Futterman tells Billy the problem with his car is that it is a cheap foreign car unlike his American built Harvester. Billy is forced to run to his work at the bank along with Barney. Billy barely makes it to work and Kate asks him to sign a petition to make Dorry's Tavern a landmark so Mrs. Deagle can't take his lease away. A Man on Street says good morning to Mrs. Deagle, who angrily asks him what's good about that morning. Mrs. Harris walks up to Mrs. Deagle and asks her if she can get the bank to extend the deadline of her family's loan as her husband just received a new job and she has picked up odd jobs, but neither of them will be paid for two weeks. Mrs. Deagle refuses and tells Mrs. Harris to ask Santa for money and Mrs. Harris' child tells her mom that she is hungry. Mrs. Deagle brings the head of her porcelain Bavarian snowman into the bank and accuses Barney of breaking it. Billy offers to pay for it, but Mrs. Deagle tells him she doesn't want money, she wants his dog dead. Barney gets free and jumps at Mrs. Deagle who dramatically complains of her weak heart to Mr. Corben and Gerald who come to her aid. Later at Dorry's Pub, Billy shows Mr. Jones a drawing he made of a dragon with Mrs. Deagle's head on it. Gerald walks in and tells Billy that he was almost fired for the incident with Barney, but Mr. Corben didn't want to fire him during the holidays, something he wouldn't have cared about. Kate, who is working part time for Dorry, asks Gerald if he wants a drink and Gerald hits on her. Billy goes home and is greeted by Lynn Peltzer who is cooking. Billy tries to help his mother by using the Peltzer egg helper which fails to work and only smashes the eggs. Rand comes home and has Billy open his gift, Gizmo. Rand tells Billy the three rules concerning Gizmo including the most important one of not feeding him after midnight. Pete drops off the Petlzer's Christmas tree and Billy shows him Gizmo who is watching the movie To Please a Lady. Billy shows Pete, Gizmo and while Gizmo is singing, Pete accidentally knocks over a glass of water onto Gizmo causing his back to spasm and Gizmo colored balls to pop off. The balls eventually grow into five new Mogwais including Stripe who tries to bite Pete when Pete tries to pet him. Billy shows Rand the new Mogwais and Rand predicts the Mogwais will be the next big pet. During the night Billy wakes up to Barney whimpering and finds him tied up in the Christmas lights outside which he blames on Mrs. Deagle. Rand tells Billy that he is going to take Barney to his Mom's house on his next trip and bring him back Christmas Eve. The next day, Billy takes one of the Mogwais to Roy Hanson and drops a tiny eye dropper worth of water on it and a new Mogwai is born. Roy asks if he can keep one to study it and Billy says yes. Billy stops at Dorry's to walk home Kate, who tells a drunk Mr. Futterman he should probably walk home and not drive. Before leaving, Mr. Futterman tells Kate and Billy of the Gremlins that foreigners would plant in their aircraft during World War II. While walking Kate home, Billy finds out that Kate hates Christmas and then Billy asks Kate on a date and Kate accepts. Roy Hanson takes a blood sample of the Mogwai and leaves his sandwich nearby which the Mogwai steals and eats. At Billy's house the Mogwai's beg for food and Billy gives them some chicken after checking it isn't midnight yet. Billy wakes up to the Mogwais being encased in cocoons and finds out his clock's electrical wire was eaten through. Rand calls home from the Inventors Convention and tells Lynn the competition, which consists of working time machines and robots, is tough. Mrs. Deagle pushes Dorry out of the way and tells Billy to deposit a check in her account and threatens Barney once more.
School ends for the holidays and Roy Hanson calls Billy at the bank and tells him the Mogwai has hatched. He goes looking for the hatched Mogwai which had run off in his classroom. While trying to entice the Mogwai out with a candy bar, the Mogwai bites Roy who screams in pain. Billy runs to the school and finds Roy dead with a needle stuck in his butt. The Mogwai attacks Billy and then runs away. Lynn hears a noise in Billy's room and grabs a knife and investigates. Billy calls home, but their call is cut short when Stripe rips out the phone cord. Lynn walks into the kitchen and finds a Mogwai eating her gingerbread cookies. She kills it by turning on the mixer when the Mogwai has its head stuck in it. She kills another Mogwai by stabbing it to death and kills another one by spraying it in the face with flea and tick spray and knocking it into the microwave and turning it on until it explodes. She walks into the living room and is attacked by a Mogwai hiding in the Christmas tree. Billy makes it home and uses a sword hanging from the wall to cut off the Mogwai's head, which goes flying into the fireplace. Stripe sneers at Billy and Lynn and then breaks the window and runs off. Billy takes Lynn to their neighbor's house belonging to Dr. Molinaro and Mrs. Molinaro and drops her off. He returns to his house and finds Gizmo in the laundry shoot and he puts him in a backpack. Billy tracks Stripe to the Kingston Falls Y.M.C.A., but before he can catch him, Stripe jumps into the pool. At the Sheriff's office, Billy tells Sheriff Frank and Deputy Brent about the Mogwais, which he calls Gremlins. Meanwhile, Stripe leads a large group of Gremlins into town. Mr. Futterman is watching television when the signal goes out. He at first blames Mrs. Futterman, and as he is going outside to mess with the antenna, a group of Gremlins break into their house riding his International Harvester and drive it at the couple. Father drops a couple of letters in the mailbox which are immediately spit back out. He watches as Mr. Anderson stick his hand in the mailbox to drop off a package. Mr. Anderson's hand gets stuck and then he cries out in pain. Billy shows Frank and Brent, Gizmo, but they still don't believe him until they get a call from someone telling them about the accident at the Futterman's. Mrs. Deagle hears Christmas carolers outside her house and screams as she is about to throw a pitcher of water at them but sees they are Gremlins. She climbs into her motorized wheelchair that goes up her stairs and as she turns the button on, the wheelchair malfunctions and Mrs. Deagle goes flying out her window to her death in front of Sheriff Frank and Deputy Brent. They then watch as Dave Myers, dressed as Santa is covered in Gremlins and screams for help. They drive off, but crash their vehicle when their brake lines are cut by the Gremlins and they run into the back of a truck. Meanwhile at Pete's house, he is using a slingshot to fight against the Gremlins. On the Rockin' Ricky Rialto live show, Rockin' Ricky is attacked by Gremlins on air. At a gas station Rand sells the gas station attendant a Peltzer Smokeless Ashtray. At Dorry's Kate is being terrorized by a large group of Gremlins who are demanding drinks. Kate figures out the Gremlins don't like light when she tries to light one's cigarette. She uses a Polaroid camera to stun a group of Gremlins and runs out of the bar where she meets up with Billy. They run across the street to the Union Savings and Trust but find it trashed, Gerald hiding in the vault and Mr. Corben dead with a large clock smashed into his head. Kate then tells Billy why she hates Christmas. Her father disappeared on Christmas Eve and then days later when she went to light a fire in the fireplace she noticed a smell. When the firemen arrived they found her father dead in a Santa suit in the chimney. They leave the bank and find the town empty. They then find all of the Gremlins hiding in the movie theater which is playing Snow White and the Seven Dwarfs. Billy comes up with a plan to blow up the theater by filling it with gas and lighting a fire. As Billy, Kate and Gizmo are escaping from the now gas filled theater, they are spotted by the Gremlins, however they escape before the theater explodes killing all of the Gremlins except for Stripe who left to go to a candy shop. They break into the candy store and then Kate and Gizmo go to find a light switch while Billy goes to look for Stripe. While looking for Stripe, Billy is attacked by him numerous times with saw blades, a crossbow and a chainsaw. Rand is driving into the destroyed town when Barney starts barking and jumps out of the car. Billy walks into the garden area and Stripe calls his name and starts shooting at him. Stripe sticks his hand in a fountain and his back starts to bubble when Gizmo comes crashing in driving a Barbie Car. Gizmo pulls on a chain which opens an overhead window and Stripe starts to burn and melts into a puddle. Billy, Kate, Rand, Gizmo, and Barney leave the store as the Stripe puddle continues to bubble. As they are sitting in their home a news report comes on the television and Lew Landers talks about what is called a riot in town. The Grandfather enters the Peltzer house and returns Rand's money. He takes Gizmo back, who tells Billy goodbye, but before leaving tells Billy that maybe someday he will be ready and Gizmo will be waiting. Grandfather then walks away carrying Gizmo.