A masked intruder attacks teenager Amy as she showers (resembling the opening scene of Halloween and the shower scene from Psycho). The attacker turns out to be her younger brother Joey, a horror film buff, and his weapon is a fake rubber prop knife.
Against her father's wishes, Amy visits a sleazy traveling carnival with her new boyfriend Buzz, her best friend Liz, and Liz's irresponsible boyfriend Richie. At the carnival, the four teens smoke marijuana, peep into a 21-and-over strip show, heckle fortune teller Madame Zena, visit the freaks-of-nature exhibit, and view a magic show.
Richie dares the group to spend the night in "The Funhouse", which is actually a dark ride. After the park closes, the teenagers settle down inside the funhouse, at which point they witness the ride assistant, a silent man in a Frankenstein's Monster mask, engage Zena as a prostitute. He experiences premature ejaculation, but despite his request, Zena will not return her $100 fee. He murders her in a violent rage.
The teenagers try to leave, but find themselves locked inside the funhouse. As they attempt to escape, Richie secretly steals the money from the safe from which the masked assistant took Zena's fee. The funhouse's barker, Conrad Straker, discovers what his son Gunther Twibunt (the masked assistant) has done to Zena. Conrad also realizes that the money is missing. Thinking Gunther took it, he attacks him. Gunther's face is revealed to be gruesomely deformed with sharp protruding teeth, long white thinning hair, and red eyes.
The teens see this, and Conrad realizes someone is watching after Richie's lighter falls on the floor from the ceiling he and the others were hiding in. Buzz concludes that Richie has the money. Richie insists that he would have split the money with the others. Despite Liz wanting to return the money, Buzz knows it's too late since they are now in danger. Conrad stalks the funhouse to eliminate any witnesses and heckles Gunther into a murderous rage. The teens arm themselves with the various funhouse props as weapons.
Richie is hanged with a rope by Conrad, and the remaining three witness his corpse riding through on a cart. Liz, hysterical, falls through a trap door and is confronted by Gunther. She stabs him with a dagger, and he kills her by pushing her head through an industrial exhaust fan. Buzz stabs Conrad to death when he confronts him and Amy, but is then killed by Gunther. During a showdown between Amy and Gunther in the funhouse's maintenance area, Gunther is electrocuted and crushed to death between two spinning gears.
As dawn breaks, a traumatized Amy emerges from the funhouse and heads home as the animatronic fat lady perched atop the entrance laughs.
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