In 1950s Christchurch, New Zealand, a fourteen year old girl from a working class family Pauline Parker (Lynskey) befriends the more affluent English fifteen year old Juliet Hulme (Winslet) when Juliet transfers to Pauline's school. Together they create fantasy worlds and become close friends. Over the course of two years, their friendship grows more and more intense. Juliet invites Pauline to her home in Ilam, a suburb of Christchurch. Pauline finds herself amazed by the wealth of Juliet's family. The girls soon develop a fantasy kingdom called Borovnia, and begin to dress up and enact the adventures of the royal family. They then write out the story lines as short novels, which they hope to publish in America. At the same time, they begin inventing a quasi-religion centred around an imaginary place called 'The Fourth World', where they worship their favorite film stars and opera singers as saints.
Juliet has an attack of tuberculosis and is sent to a clinic. Pauline is desolate without her, and the two begin an intense correspondence, writing not only as themselves, but in the roles of the royal couple. Pauline, who sleeps in one of the small rooms that are a part of the boarding house her parents run, is courted unromantically by John, one of the boarders who is in love with her, and she loses the small amount of privacy she has, when the man is discovered in bed with her by her father. After four months, Juliet is released from the clinic and their relationship continues. Pauline records their relationship in a diary, which was given to her by her father for Christmas. The girls' relationship has progressed and become incredibly strong. Julietís father arrives at the Parker house and discusses the girls' intense relationship. He insists that Paulineís mother, Honora, must take Pauline to a doctor. The doctor suggests Pauline may be homosexual - regarded as a mental illness in 1950's New Zealand. The parents agree that the girls must be separated. They will be allowed to spend two weeks together before Juliet moves to South Africa to live with her aunt Enna, ostensibly for the warmer climate. The girls plan, unsuccessfully, to run away together to America. They plot together the murder of Paulineís mother, Honora, whom they perceive as the main obstacle to their happiness. Juliet is nervous, but Pauline says she feels extremely excited about the murder. Honora, Pauline and Juliet arrive at Victoria Park. They have snacks at a teahouse, and then venture down a track where the girls ambush Honora and attack her using a brick in a stocking. While she is examining a pink stone that the girls planted on the track, they bludgeon her to death, smashing her head to pulp with their improvised blackjack.