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At a German military hospital, a wounded soldier cries out against the false honor of war. His words are drowned out by a schoolteacher telling his youthful class that there is no greater glory than dying for one's country. After class, the schoolteacher chastises a group of boys for passing notes. Boka, the leader of the boys, tells his teacher that they are "The Paul Street Boys" and another gang of older boys, "The Red Shirts," have been invading their playground, which is an abandoned lumber yard. The schoolteacher orders the boys to break up the gang, but later that very afternoon they elect Boka their president in a landslide victory over another boy, Gereb. Nemecsek, the smallest boy in the gang, complains that he is the only one that is not an officer, but Boka tells him that all armies need privates and he is theirs. As the boys perform in true military fashion, the watchman, a war veteran missing his left arm, watches over them. Later, as Nemecsek and some of the other boys play marbles under a bridge, Feri Ats, the leader of The Red Shirts, arrives and takes their marbles away. Back at the playground, Gereb acts the traitor by letting Feri Ats into the lumber yard, where he takes their flag as a terrified Nemecsek watches helplessly. Boka decides that they must recapture their flag "or die trying" that night at The Red Shirts meeting place, the botanical gardens. Nemecsek volunteers for the mission, hoping that he may somehow distinguish himself and become an officer. Boka, Nemecsek and Csonakos sneak into the gardens, only to discover the traitor Gereb meeting with their rival gang. In their unsuccessful attempt to re-capture their flag, Nemecsek gets wet when he falls into the lake, then is forced to hide in a pond inside a greenhouse once they are discovered. After returning home that night during a thunderstorm, Nemecsek develops a severe cold. His parents insist that he stay home, but he sneaks out. That night at the botanical gardens, Gereb tells Feri Ats that he has bribed the watchman to throw The Paul Street Boys off the lumber yard and let The Red Shirts move in. Feri Ats, a boy of great honor, calls Gereb a coward and insists that the playground be won in open battle. The gang then discovers their captured flag missing, only to have Nemecsek fall out of a tree with it. Nemecsek shows great bravery in standing up to the gang, so much so that the impressed Feri Ats offers to let him join their gang. Nemecsek refuses, stating that he, unlike Gereb, is not a traitor. Rather than beating him, Nemecsek is punished by being dunked once more in the lake, but as he leaves, the impressed Feri Ats orders his gang to salute the small boy. The next day, Boka and the gang prepare to defend their "land." Gereb returns and asks to be taken back into the gang, but he is initially refused. The next day, Nemecsek is deathly sick in bed. A doctor is called, and he tells Nemecsek's father that his son may die. Boka comes to visit and brings with him an army cap, as Nemecsek has finally received his "commission." Boka tells the boy that Gereb has been accepted back into the gang as a private, and that the two gangs are to do battle that afternoon and whoever retains The Paul Street Boys flag at the end of the battle wins the playground. With great military ceremony, the two gangs prepare for battle, including sending honor guards to each other and the ill Nemecsek. Delirious, Nemecsek sneaks out of his bed to join his comrades in the battle. The "war" begins, with Boka's battle tactics working to perfection, but Feri Ats, because of his greater strength, still holds the flag as the end nears. The battle stops when Nemecsek enters the playground. When he sees Feri Ats with the flag, he jumps on the older boy and dies with the flag in his hand. Boka, Feri Ats and the other boys escort Nemecsek's mother as she carries her dead son home. The next day, the two gangs watch The Paul Street Boys flag being raised once more over the playground, as bulldozers roll in. The watchman states that their battle has all been in vain, as the lumber yard is being converted into an apartment building.