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An unnamed narrator listens to a male friend reading a manuscript written by a former governess whom the friend claims to have known and who is now dead. The manuscript tells the story of how the young governess is hired by a man who has become responsible for his young nephew and niece after the death of their parents. He lives mainly in London and is not interested in raising the children himself.

The boy, Miles, is attending a boarding school, while his younger sister, Flora, is living at a country estate in Essex. She is currently being cared for by the housekeeper, Mrs. Grose. The governess's new employer, the uncle of Miles and Flora, gives her full charge of the children and explicitly states that she is not to bother him with communications of any sort. The governess travels to her new employer's country house and begins her duties.

Miles soon returns from school for the summer just after a letter arrives from the headmaster stating that he has been expelled. Miles never speaks of the matter, and the governess is hesitant to raise the issue. She fears that there is some horrid secret behind the expulsion, but is too charmed by the adorable young boy to want to press the issue. Soon thereafter, the governess begins to see around the grounds of the estate the figures of a man and woman whom she does not recognize. These figures come and go at will without ever being seen or challenged by other members of the household, and they seem to the governess to be supernatural. She learns from Mrs. Grose that her predecessor, Miss Jessel, and another employee, Peter Quint, had had a sexual relationship with each other and had both died. Prior to their deaths, they spent much of their time with Flora and Miles, and this fact has grim significance for the governess when she becomes convinced that the two children are secretly aware of the presence of the ghosts.

Later, Flora leaves the house while Miles plays music for the governess. They notice Flora's absence and go to look for her. The governess and Mrs. Grose find her in a clearing in the wood, and the governess is convinced that she has been talking to Miss Jessel. When she finally confronts Flora, Flora denies seeing Miss Jessel, and demands never to see the governess again. Mrs. Grose takes Flora away to her uncle, leaving the governess with Miles. That night, they are finally talking of Miles' expulsion when the ghost of Quint appears to the governess at the window. The governess shields Miles, who attempts to see the ghost. The governess tells him that he is no longer controlled by the ghost, and then finds that Miles has died in her arms.

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