At a satanic ceremony, a baby named Jonathan Graves is about to be sacrificed by his glowing-eyed father, Malcolm (Michael Des Barres). Jonathan's mother, Anastasia (Victoria Catlin), rescues the child and puts an amulet around his neck that produces an electric shock when Malcolm touches the boy. Malcolm orders a participant named Wolfgang (Jack Nance) to take the child away, and sacrifices Anastasia instead.
Many years later, Jonathan (Peter Liapai), who was raised by Wolfgang, inherits his unknown father's estate. Wolfgang believes the evil curse has died along with Malcolm, and reveals nothing to Jonathan about his parents. While Jonathan and his girl friend Rebecca (Lisa Pelikan) tour the grounds, they stumble upon Malcolm's grave, and Jonathan introduces Rebecca to the mysterious Wolfgang. In the house, Rebecca finds several books on magic and discovers a basement full of occult paraphernalia.
Later, the couple throws a party in their new home, and invites their wild friends. For fun, Jonathan recruits his friends to perform a ritual, and he instinctively draws an occult diagram, and recites a conjuring spell from a book. When nothing happens, everyone leaves the basement to search for their missing friend, Robin. Elsewhere, Wolfgang awakens in alarm, as a mysterious creature materializes in the basement. Robin is later found roaming the grounds, and strange things begin occurring throughout the estate.
Soon after the party ends, Jonathan tells Rebecca of his decision to quit college and work on the estate instead, and Rebecca expresses her concern. Jonathan begins fixing up the house, and is soon lured by the spirit of his evil father to perform satanic rituals. He later forges a gold medallion, and gives the "talisman" to Rebecca for protection. When Jonathan refuses to eat, explaining that he is fasting, Rebecca's concern grows.
After performing another conjuring spell, Jonathan brings forth several evil creatures called ghoulies, and proclaims himself their "master." He then demands that they hide their existence from everyone but him. In time, Jonathan dons a ceremonial robe, and with glowing green eyes, summons more dark power. When Rebecca enters, she is surprised to see Jonathan's activities. He explains that he is trying to learn about the parents he never knew, and promises to stop his strange behavior. Later, as the couple make love, the ghoulies sneak under the bed and create an occult diagram, prompting Jonathan to chant in another language. Rebecca is furious that Jonathan's dark activities are continuing, and she leaves him.
Sometime later, Jonathan conjures two dwarfs named Grizzel (Peter Risch) and Greedigut (Tamara De Treaux), and he demands that they serve him. The dwarfs promise to give him everything he desires including infinite power and knowledge, and the return of his lover, Rebecca. They explain that he must perform a dangerous ritual, with seven others, to obtain the knowledge and power he craves. Rebecca later returns and asks Jonathan to leave the house, but he refuses. When Jonathan reveals his glowing eyes to Rebecca, she attempts to flee. However, the dwarfs cast a spell on the girl, causing her to return to Jonathan's side. Meanwhile, Wolfgang is aware of the dark magic that is ensuing, but claims to be powerless against it.
On the night of a full moon, Jonathan gathers his seven friends for a dinner party, and soon puts them under a spell so they will participate in the "master ritual." As Jonathan begins chanting, outside, his father, Malcolm, stirs in his grave. After the ceremony, Jonathan's friends, who are oblivious to the ritual, are invited to spend the night. The zombie-like Malcolm rises from his grave and proclaims himself master of the ghoulies. While frolicking on the grounds, friends Donna and Mark "Toad Boy" are attacked by the ghoulies. When Malcolm enters the house, he takes the form of a woman, and lures a young man named Dick to him, then kills the boy.
Meanwhile, Jonathan apologizes to Rebecca, before breaking her spell by placing the talisman around her neck. Before Rebecca can react, she falls into a deep sleep. Elsewhere, the ghoulies attack Eddie and Robin.
When Rebecca later awakens, she sees Jonathan in a trance-like state, and runs away. After removing her medallion, she is attacked by ghoulies, and falls down a flight of stairs. Jonathan is horrified to find his lover dead, and attempts to use his powers to resurrect Rebecca.
In the basement, Jonathan discovers his possessed friends, and Malcolm enters, claiming to be their master. As father and son battle, Malcolm tries to capture his son's youth. While Jonathan chants a spell, Malcolm raises Rebecca from the dead, as a distraction for Jonathan. Grizzel and Greedigut, standing at Malcolm's side, alert Jonathan to the trap. Malcolm continues his efforts to steal his son's life, and Wolfgang arrives, using his own magical powers to fight Malcolm. As the house begins to crumble, Wolfgang defeats Malcolm, and they both disappear. Jonathan revives his friends. They emerge into the daylight, and drive away from the house.
Riding with Jonathan and Rebecca, their friend, Mike, asks "what happened?" Jonathan assures him that it is all over, but Mike is alarmed when ghoulies appear behind him.