In an old house on a Christmas Eve, the subject of ghosts is brought up. A man named Douglas tells of his sister's governess, who had reported seeing apparitions some years ago; in fact, she had recorded her experience in a manuscript that he promises to send for. Upon further questioning, it is learned that the governess was hired to take care of two young pupils who had been left under the care of an uncle. When this man hired the governess, he gave her implicit instructions that she was to cope with any problem and never bother him.
The governess' story opens on the day she arrives at her new position. Her charges — Miles and Flora — are perfect little children who would apparently never cause anyone any trouble. She grows very fond of them in spite of the fact that little Miles has been discharged from his school. In discussing this occurrence, the governess and Mrs. Grose, the housekeeper, decide that little Miles was just too good for a regular school.
The governess loves her position and her children, and she secretly wishes that her handsome employer could see how well she is doing. Shortly after this, she notices the form of a strange man at some distance. She wonders if the large country house harbors some secret. But some time later, she sees the same face outside the dining room window. When she describes this face to Mrs. Grose, she hears that it was that of Peter Quint, an ex-servant who has been dead for about a year.
Next the governess encounters another apparition in the form of a lady. Upon further consultation with Mrs. Grose, it is determined that this was the children's former governess, Miss Jessel, who died mysteriously about a year ago. When the present governess presses Mrs. Grose for additional information, she learns that Peter Quint and Miss Jessel had been intimate with each other and, furthermore, that both had been too familiar with the children.
After more appearances, the governess decides that the figures are returning to see the children. She then begins to wonder if the children know of the presence of the apparitions. Upon observing the children's behavior, she decides that they must be aware of the presence of these figures. She notes that once in the middle of the night little Miles is out walking on the lawn. Also, little Flora often gets up in the night and looks out the window.
Coming back early one day from church, the governess finds Miss Jessel in the schoolroom. During the confrontation, the governess feels that the former teacher wants to get Flora and make the little girl suffer with her. She is now determined to break her arrangement with her employer and write to him to come down.
Walking by the lake that day, she sees the figure of Miss Jessel again and directs little Flora's attention to it. But the little girl can see nothing. Furthermore, the housekeeper, who is along, can see nothing. Mrs. Grose takes little Flora and goes back to the house. The next day the housekeeper comes to the governess and tells of the awful language young Flora used and reasons that the girl must be in contact with some evil person in order to use such language.
The governess has little Flora taken away and that night as she is talking with little Miles, the figure of Peter Quint appears at the window. When the governess confronts little Miles with this apparition, the boy collapses and the governess notes that he is dead.