Plot
In the late 19th century, the demonic troll Trantor transforms children into wooden dolls to feast upon their energy in Briarville, Missouri. The townsfolk capture him and seal him under an oak tree, with Phineas Worrell, one of the village elders and an ancestor of Ernest P. Worrell, establishing the seal. Trantor vengefully places a curse on the Worrell family, stating that he can only be released on October 30, the night before Halloween, by a Worrell. As part of the curse, every generation of Worrells will get "dumber and dumber and dumber", until the dumbest member of the family is foolish enough to release him from his earthly prison.
One hundred years later, Ernest, a sanitation worker, helps a few of his middle school friends, Kenny Binder, Elizabeth and Joey, construct a treehouse in the same tree that unknowingly contains the dormant creature, after the mayor's sons demolished their own cardboard haunted house. When Old Lady Hackmore discovers this, she angrily leaves. Following her, Ernest learns the story of Trantor and idiotically reports it to the kids. Inadvertently, Ernest releases the troll.
Joey is walking home from the treehouse when he hears something rustling through the trees. Joey slowly walks and slips down in a muddy hole. Trantor grabs Joey's wrist and turns him into a wooden doll. Ernest finds Kenny's dad, Sheriff Cliff Binder, and explains the situation but Binder does not believe him. After none of the townsfolk will assist Ernest because of the upcoming Halloween party, he mounts a one-man (and one-dog) defense operation in preparation for Trantor's appearance. Meanwhile, Trantor captures a boy on a skateboard as his second victim.
Tom and Bobby Tulip, hoping to exploit Ernest, sell him various fake troll traps, but one backfires on the mayor's sons and Ernest loses his job. Ernest, Kenny and Elizabeth return to Hackmore, where they learn that only "the heart of a child, and a mother's care" can defeat the troll. Later that night, Trantor claims Elizabeth as his third victim as he sneaks into her house while she is resting on her bed.
While Kenny and his friend Gregg are walking, Trantor uses Elizabeth's voice to lure Kenny away, then takes Gregg as a fourth victim. Despite parents being upset at their missing children, Mayor Murdock and Sheriff Binder still proceed with a Halloween party at the school, believing the missing children will be there. Trantor appears there and takes the mayor's oldest son as his fifth and final wooden doll. In the ensuing fight between Trantor and Ernest, Trantor turns Ernest's dog Rimshot into a wooden doll before being repelled by soft-serve ice cream on Ernest's hands. Kenny realizes that "mother's care" refers to milk and rallies a troll-fighting team to destroy them.
Back at the treehouse, Trantor successfully summons his army of trolls while Ernest unsuccessfully tries to stop them. The townspeople show up, only for the trolls to overwhelm and beat them up. Kenny and his friends arrive and begin destroying the trolls with milk. During the fight, Trantor escapes beneath the tree where he summons the powers of the underworld, making him invincible, especially to milk. Enraged, Kenny unsuccessfully tries to destroy Trantor, who also turns Kenny into a doll. With the other townsfolk now backing him up and telling him to douse Trantor in milk, Ernest realizes that milk weakened the troll children, while unconditional love ("the heart of a child") would weaken Trantor himself. He takes Trantor and dances with him while the mob watches, overloading him with love, and finally kisses his snot-ridden nose, causing Trantor to explode.
With Trantor's destruction, Ernest is proclaimed a hero. Sheriff Binder apologizes to his son for doubting him and Ernest. All of the wooden dolls as well as Rimshot are restored, including those from the early 19th century, and everyone is reunited with their families.
