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The movie begins with Nicole Kidman waking up from a nightmare. It is 1945 in Britain, and her husband was fighting in France but he has yet to return home, even though the war has ended. She lives in a big, creepy house alone with her two kids, Ann and Nicholas; recently, like a week or two ago, all the servants just upped and abandoned them, without a word or collecting their wages.
Three servants-- Lydia (who's mute), Mr. Tuttle, and Mrs. Bertha Mills-- come to her door, to respond to an ad that Kidman had posted for new servants. They are all shown around the house by Kidman, who explains the rules... one must never open a door without closing the previous one, and the drapes must always be shut because her children are "photosensitive"-- they break out in rashes and sores if they are exposed to light stronger than candlelight.
One day, Kidman goes to the mailbox and sees that the letters she'd sent out to the newspaper announcing positions are still there. She confronts Mrs. Mills angrily, demanding to know who they are.. and how did they know of the jobs if the ad hasn't even come out yet? Mrs. Mills then tells Kidman that all three of them had used to live in the house, and had loved it so much that they come back to see if they could be of any use, as a house as big as Kidman's always needs extra help.
Strange things happen in the house. Sometimes, there are people talking and whispering and crying; thuds and noises come from empty rooms; Ann talks to an invisible boy, Victor, and insists that there are others walking around the house. Kidman refuses to believe her, and frequently tells her to stop and punishes her for "lying"; Mrs. Mills assures Ann that she believes her and that soon her mother will see. Mrs. Mills then tells Kidman that sometimes the world of the living gets mixed up in the world of the dead. Kidman refuses to believe until one day, she is sewing Ann's communion veil when she heard thuds upstairs; she races to investigate but there's no one there, and she sees in the mirror that the door is closing all by itself. Kidman then goes on a hunt to seek out the intruders, enlisting her whole household (and this is the first of two or three such hunts)... she then wants her house blessed so she goes out to find the priest.
Mrs. Mills races after her and tells her not to go; Kidman leaves and Mrs. Mills talks to Mr. Tuttle, who's doing the lawn work; she says that eventually it'll all come out and tells him to hide these gravestones on the property. Kidman gets lost in the mist and she finds her husband, who looks lost and very out of it, and brings him home, but he won't speak or do anything but stay in bed. Now Kidman, who'd previously started to believe in the "intruders," revert back into stubbornness. Her daughter shows her the picture she'd drawn, of Victor and his parents (including a pianist father who played the piano invisibly one night) and of the old woman, with sightless eyes. In one of her hunts for the "intruders" Kidman finds a book of photography, including this book in which there are people posed and "sleeping"-- until Mrs. Mills tells them that those people are dead, and that it's a book of the dead, which the superstitious believed would guard the souls of those dead.
Kidman and her daughter are putting the finishing touches on her communion dress when Kidman had to leave for a moment. She comes back and is horrified to see that not only is her daughter sitting on the floor in her spotless dress, but she's become this creepy old woman-- so she grabs her daughter in a chokehold and starts to scream and hit her. The veil rips off to reveal that it is her daughter, crying; she then runs away and Kidman is shaken and thinks she's gone mad. Then going back to her husband's room, he tells her that Ann has told him of what had happened a week ago. Kidman breaks down and cries and protests that it wasn't her fault; but then he tells her that he has to leave and she knows that for all of her excuses he needs something beyond her family and herself.
So he leaves, and the next morning the curtains are gone. The children are screaming and Kidman is demanding from her three servants hysterically where they are; she even grabs a gun and threaten them and tells them to leave, because they're not helping her and they must have stolen the curtains. The children go to bed but they then climb out the window because they want to look for their father and they're kind of scared of their mother. Kidman is ripping apart the house looking for curtains; she goes into the servants' rooms and finds an envelope on the bed, containing a photograph of Mr. Tuttle, Lydia, and Mrs. Mills, inscribed 1891, from the book of the dead.
The mists are surrounding the island when Ann comes across the gravestones of the three servants, and then she sees them in the distance. They're approaching her and Nicholas, and they both run into the house with the servants following; Kidman is there and she locks them out, and tells her children to hide while she fends them off. Mrs. Mills then tells Kidman from outside the doors that it's too late, now she has to go and find them herself. Meanwhile, Nicholas and Ann run upstairs into a wardrobe, and hide but the door is thrown open to reveal a white-haired old lady with opaque eyes... and everyone screams, including Kidman who's run upstairs by now.
The camera then turns to a group of people who are sitting around a table, including the old lady, now acting as the speaker of the seance. She is asking the children why they are lingering around in death? Ann and Nicholas scream that they aren't dead, and Kidman is grabbing the paper and tearing them apart, screaming too, and shaking the table, trying to get the speakers attention. We see that the papers are flying up by themselves and the table shaking but don't see Kidman and the kids. Just the startled participants of the seance. It then stops and the old woman is snapped out of the trance. We discover that Kidman had smothered her children in their sleep, and then shot herself ("a week or two ago, the servants disappeared"-- because their employer, Kidman, had died); The present occupants of the house are the pianist father, mother, and the child Victor (who eventually leave the house due to the hauntings of Kidman and her children). The three servants had died in the TB epidemic half a century ago, and somehow, everyone still lives in the house, the living side by side with the dead.
The movie ends as the occupants, unable to rid the house of Kidman and the kids, drive away with Kidman watching from an upstairs window. The sign on the gate says the house is For Sale.
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