It is based on South Korean horror film A Tale of Two Sisters. The movie begins with a young girl, Anna (Emily Browning), making out with her boyfriend Matt on the beach at a party. After he tells Anna he loves her and has "a condom", she gets up to leave. As she goes, her sister Alex (Arielle Kebbel) asks if everything is all right. On her way through the woods to her house, Anna encounters three white garbage bags. When she goes to open them, the cadaver of a redheaded girl falls out. As Anna recoils, the girl's head snaps around and speaks. Screaming and afraid, Anna runs home. She then hears a bell that her terminally ill mother rings when she needs something. Anna is concerned because her mother is not supposed to be alone. However, after she leaves the boathouse her mother is in, it explodes into flames and a piece of debris comes flying towards her, burning her. It is then revealed that this is a dream Anna is having.
She has been in a mental hospital since the death of her mother ten months earlier, but her psychiatrist believes she is ready to leave. He tells her to "finish what she started". As Anna packs, another patient comes in, asking Anna who she will tell her stories to now that Anna is leaving. Anna's father takes her home, where she is joyfully reunited with her sister, Alex, who is angry, asks why Anna never responded to the mail she sent her. Anna then tells her that she never received any letters; Alex yells at their father for not sending them. He ignores her. Anna also sees Rachel (Elizabeth Banks), her mother's former nurse who is now dating Anna's father. Later that night, Anna overhears Rachel and her father having sex, so she turns up her music to a louder volume. She also has nightmares about a dead body trying to grab hold of her, but when she wakes up, it is merely Alex standing over her.
The next day, Anna meets with Matt, her former boyfriend. Matt tells Anna he knows what happened the night of the fire. However, Rachel comes before he can say anything more and sends him away. That night, Anna wonders to herself if the fire that killed their mother was not an accident. The next day, she and Rachel go into town so Anna can talk to Rachel. At a diner, Rachel discusses her former patients with Anna, telling her that the only way she got through it was by reminding herself that the people she was caring for would be dead soon. She also showed Anna her pearls, saying they were a gift from one of her patients. Anna sees the little redheaded girl from her dream along with two little boys sitting on the chairs, but in a moment they are gone.
When Anna meets up with Matt, he tells her he will meet her at "the rock" that night to tell her what he saw. Anna and Alex wait on the rock for a while. When Matt doesn't show up, Anna goes back home and upstairs to her bedroom. Matt comes into her room through the window, saying he hurt his back. They speak for a few minutes and then begin to kiss, but when Anna runs her hand down his back, she touches a bone, which had snapped. He grabs her arms as she recoils in horror. Anna runs out of the room, but when she opens the door again, Matt is gone. The next day they find out that Matt had fallen into the water, snapped his back, and drowned, on his way to see Anna. Anna shows Alex that there are bruises on her arms where Matt grabbed her. Alex explains that Rachel had gotten rid of Matt because he saw what she did on the night of the fire. With Matt gone, only Anna and Alex are in the way of Rachel and her obsession with their father. Alex becomes scared for them both.
Later that night, Anna and Alex start research session and learn that Rachel is perpetrating identity theft. Anna confronts Rachel, who becomes angry and tells Anna if she says anything, she'll be sent back to the mental hospital. That night, Rachel has a dinner party that Anna inadvertently ruins after the red-haired girl comes out from under the stove, telling Anna that "she's next". The girls' father goes for a business trip on the day of Matt's funeral, and the redheaded girl shows Anna to the gravestones of a family of five. Later that day, she researches the children of the family. The suspected killer was a woman named Mildred Kemp, who was the nanny of the three children after their mother had died in a car accident a year before. The killer had heavily sedated the children before stabbing them repeatedly. In a picture, Anna sees the mother wearing a pearl necklace just like Rachel's. The two sisters begin to think that Rachel and Mildred are one and the same.
Alex and Anna try to get to the pearls as evidence for a case against their father's girlfriend. A struggle ensues between Anna and Rachel, but Anna manages to get the pearls. When she goes upstairs to check if Alex is okay, she finds that Rachel has heavily drugged her with the needles Anna and Alex found earlier, and she must leave Alex behind. Anna finds Rachel's car keys and tries to drive away, but the car stalls and Rachel catches up to her, only to be dragged to the ground once Anna manages to start the car again and drive off.
At the police station Anna explains everything, begging the police officer to hurry because Alex is still at the house. He leaves, and while he is gone Anna falls asleep and dreams about her mother, but as she gets closer to her, the dream ends, replacing her mother with Rachel, who, with the police officer's help, sedates Anna and takes her back to the house where she suspects Rachel will kill her. As Rachel prepares to dress Anna in her pajamas, Anna reaches for the knife on the dresser, but can't grasp it. As the drugs are taking over, Anna sees Alex creeping up behind Rachel before she finally blacks out. Once Anna wakes up once more, she sees a trail of blood that leads to the body of Rachel outside in a dumpster. Alex steps out from the woods covered in blood, holding the knife and exclaiming that she had to do it. They hug and clasp hands when their father pulls up into the driveway. Anna and Alex begin explaining what happened. Alex tells her dad that he never listens to her, but now he should. Anna and Alex tells their father what happened, and when Anna kept asking Alex to tell their father what she did to Rachel, her father grasps her and tells her that Alex is dead; she had died in the fire a year ago (which would explain why nobody paid attention or listened to what we knew as Alex earlier in the film).
Anna looks around for Alex, but realizes she is alone. Suddenly, she notices Alex standing in the shadows. As Anna slowly walks toward her, she sees that it's her reflection in a mirror, with the blood-stained clothing and holding the bloody knife instead of Alex.
It is revealed that the night of the party, once Anna had come home, she had seen Rachel and her father having sex. Disgusted, she went to the boathouse to fill a watering can with gasoline so she could burn down the house. However, she did not shut off the faucet all the way, and when she slammed the door, Alex accidentally knocked over a lantern. Once the gasoline reached the lantern the boathouse exploded, killing her mother and Alex. Through a series of flashbacks, we see that Alex had never really been there, and that Anna had been the one who killed Matt (because he knew what really happened on the night of the fire) and Rachel, and that Rachel was not truly evil. Rachel was only about to drug Anna because she needed to be sedated, because she was imagining things. Anna is arrested and institutionalized once again.
While Anna is back at the institution she says to her psychologist that she did what he had told her to, she had "finished what she started". It is also revealed that the institutionalized woman at the beginning was "Mildred Kemp". (Which makes sense, because Mildred asked "who am I going to tell my stories to?," which means that while Anna moved back into the house, she was remembering the stories Mildred had told her, and putting them into her own version.) Anna smiles and the credits roll.
