After the antique store owner Mr. Wing passed away, his grandson is left to care a small, furry creature called a mogwai as his new owner, Randall Peltzer, a inventor, visits Chinatown in the hope of finding a Birthday present for his son Billy. Randall encounters the creature, Wing's grandson sells the mogwai to Randall, warning him to remember three important rules that must never be broken—do not expose the mogwai to bright lights or sunlight which will kill it, do not let it come in contact with water, and never feed it after midnight.

Randall returns home to Kingston Falls where he gives the mogwai to Billy as a pet. Billy works in the local bank, where he fears his dog Barney will be captured and killed by the elderly miser Mrs. Deagle. Randall names the mogwai “Gizmo” and Billy makes sure to treat him well. When Billy’s friend Pete accidantally spills a glass of water over Gizmo, five more mogwai spawn from his back. Stripe the leader, George, Lenny, Clorr and Daffy are.

Billy shows one of the mogwai to his former science teacher, Mr. Hanson, spawning another mogwai, on whom Hanson experiments. Back at home, Stripe and his brothers tricks Billy into feeding them after midnight by severing the power cord to his bedside clock. They make cocoons, as does Hanson’s mogwai. Shortly after, the cocoons hatch and they emerge as mischievous, reptilian monsters that torture Gizmo and left Billy's house, while Hanson is killed by his 'gremlin'.

Stripe escapes to a local YMCA and jumps into a swimming pool, spawning an army of gremlins who wreak chaos around Kingston Falls. Billy tries to warn the police, but they don’t believe him. Many people are injured or outright killed by the gremlins' rampage, including Mrs. Deagle, who is launched out of her house on a stair lift that has been sabotaged by the creatures. At the local bar, the gremlins have fun until the barmaid Kate Beringer, Billy’s girlfriend, flashes them with a camera and escapes into the bank with Billy and Gizmo.

Billy, Gizmo and Kate discover the town has fallen silent and the Gremlins are watching in the local theater. They set off an explosion, killing George, Lenny, Clorr, Daffy, and all the Gremlins except Stripe. Billy chases Stripe into a Montgomery Ward store, where Stripe climbs into a water fountain and tries to spawn more gremlins. Gizmo arrives in a toy car and opens a skylight, exposing Stripe to sunlight before he can spawn new gremlins. Screeching and groaning in agony, Stripe is finally killed, slowly melting into a puddle of green ooze. After Stripe and Gremlins are gone. Billy, Gizmo and Kate watch the news of the Gremlins attack.

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