Anna, a beautiful teen girl (Emily Browning) is being released from a mental hospital. A therapist advises Anna to 'finish things that she has started', implying be productive and positive going forward. We learn Anna recently has lost her invalid mother in a fire, causing her breakdown.
She returns to her New England mansion along the shoreline. Her father (David Straitharn) introduces his new girlfriend To Anna's distress it is Rachel (Elizabeth Banks), the former at-home-nurse for her sick mother. Her mother had been housed in the family boathouse, and died when it burned down. It has now been restored, distressing Anna. We meet Anna's older sister Alex, and Matt, who makes out with Anna that night. He has something to tell Anna about the fire, but is stopped by Rachel's arrival. Meanwhile Rachel continues to try to befriend the girls, as they all fake their smiles.
Anna that night has a vision (we don’t see her as asleep) of the grotesque burned corpse of her mother warning her about Rachel, by pointing in her direction, with a bell around the wrist she used to summon help when she was alive. Anna tells her sister the next day about the warning. Her sister says it was not a nightmare, "you looked awake". They plan to snoop around about who Rachel really is or wants.
In town Anna has a vision of three ghostly children in a diner (appears to be another vision). She finds Matt, who agrees to tell Anna more about the fire when they are alone that night. Back home, Alex and Anna rummage through Rachel's belongings find different ID cards, call past employers, and google Rachel's name. All of this calls her identity into question. Anna confronts Rachel, implying she is an imposter. Rachel threatens she will just tell her dad she is having mental problems again. The sisters agree more evidence is needed before telling their dad, who announced Rachel is actually his fiancée.
That night in her room Matt is about to tell Anna about the fire. Instead he turns into some kind of creature with a broken back, similar to what Anna saw resembling her mother. He says her mother tried to warn him but he didn’t listen. We see that it is actually daylight when Anna leaves her room. Offshore police boats dredge up Matt's body. The Sheriff says Matt broke his back in an accident while coming to see Anna, and he knows how she must feel, so he can talk to him about anything. Later Anna shows Alex claw marks on arms as they talk in front of the bathroom mirror, as proof it was not a dream. They talk in the bathroom in many scenes, presumably to avoid Rachel.
At Matt's funeral, Anna sees the same ghostly children. They lead her to their graves in the woods. She googles the names on the family plot. Their teen nanny, who fell in love with their father, stabbed them to death some years ago. Anna concludes the teen nanny is Rachel, who now repeats the pattern of murdering their mother to be with their father, and they are to die next. A photo mother who was killed by the nanny shows her pearls, like the ones Rachel wears all the time.
Anna confronts Rachel and steals the pearls as her proof of the past murders. Rachel tries to inject Anna from her nursing supplies. Before Anna escapes to town, she sees Alex is injected and sedated on the ground. She goes to the Sheriff with her story about the murdering nanny. He seems to recall the story, and asks her to wait there while he helps Alex. Only he returns with Rachel, who injects her saying "its ok I’m a nurse" and she is taken back home. While being put to bed by Rachel, Anna sees Alex sneak up behind Rachel, before Anna passes out.
Anna awakens and finds Alex standing outside covered in blood with a knife, saying, "There was no other way". We see Rachel's bloody corpse in a trash bin. When her dad returns, he yells at Anna "what did you do!" Anna says it was Alex had to do it, as the sisters hold hands. Her dad says, "Anna, you know Alex is dead. She died in the fire." This is the flashpoint of the movie. We now see Anna alone covered in blood, holding the knife, not her sister's hand.
Several prior scenes now replay, but now show Anna always alone, talking to herself, implying a psychotic hallucination. This was hinted when Anna talks to her sister as they face the bathroom mirror. When people do this, it looks like they are talking to their reflection. Also, no one addressed Alex directly, but the direction is incoherent anyway.
Now by flashback we see what happened in the fire. Anna saw her dad having sex with Rachel while her mom was bedridden in the boathouse. She seemed to be carting kerosene from the boathouse to burn the main house down with her dad/Rachel inside. She accidentally spilled kerosene, killing her mom and sister instead. Then she was put in the mental ward.
As Anna is being driven away in the squad car, she looks placidly back at her dad. The sheriff mentions the name in Anna's murdering nanny story to her dad. He says it was never Rachel's name, but Rachel did change her name to avoid a stalking ex boyfriend. Neither mentions anything about a murdering nanny story.
Some time later at the mental ward, a contented looking Anna colors and tells her therapist "I did what you said. I finished what I started." We see that Anna's cellmate has the teen nanny's name and carries pearls. This implies the nanny story was also a delusion, since the Sheriff never repeated it when he asked her dad about Rachel's name change.
The direction and story are incoherent, but it is implied overall that Anna originally was trying to kill her father and Rachel for their affair, but accidentally killed her mom and sister. So she returned to kill Rachel and destroy her father. Everything else we were shown was part of Anna's psychosis.
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