Two young teachers, Martha Dobie (Shirley MacLaine) and Karen Wright (Audrey Hepburn), who met at school when they were 17, build up a private school for girls in conservative New England. Martha's Aunt Lily, an unemployed, elderly actress, lives with the two of them, and teaches elocution. After two years of engagement to Dr. Joe Cardin (James Garner), a reputable OB/GYN, Karen finally agrees to set a date for their wedding. Joe is related to rich Mrs. Amelia Tilford, whose granddaughter, Mary, is also going to the Dobie-Wright School.
Mary is a problematic, conniving child, often bullying her classmates. In particular, she blackmails Rosalie Wells, whom she caught stealing a bracelet. One day, Mary lies to Lily about skipping part of her elocution class. Karen tries to comfort Mary, saying, "If you need to let off steam, just tell us the truth and we'll try to understand," but Mary sociopathically sticks to her lie. Karen punishes her by refusing to let her attend the weekend's boat races.
A furious Mary exacts her revenge by inventing a story about Martha and Karen being involved in a love affair. Her tale is based on fragments of a quarrel that Mary's roommates accidentally overheard. Mary tells her grandmother that she observed the two women kissing each other. Mrs. Tilford believes her granddaughter, and immediately informs the other parents. As a result, all girls are withdrawn from the school, without giving Karen or Martha any explanations.
Finally, one father offers a straight answer. Karen learns the real reason behind the sudden action. She angrily confronts Mrs. Tilford together with Joe and Martha. Mary again tells her tale, and forces Rosalie to confirm her statements. The two framed women sue Mrs. Tilford for libel and slander, but fail in court. The story is circulated in the local media, utterly destroying the reputation of the two teachers.
Only Joe still keeps contact to the two women, offering to take them away and start a new life. However, even his trust in Karen is shaken, and he thus asks her if the rumors are true. In the resulting quarrel, Karen breaks up with him, claiming that she needs time to think everything over. As Martha learns about the break-up, she confides in Karen that she, indeed, always felt more than friendship for her, and that now, after hearing the made-up story, she finally realizes that she is in love with her. Meanwhile, the mother of Rosalie discovers a stash of stolen items among Rosalie's things, including the bracelet Mary used to blackmail her. The two girls are questioned, and Mrs. Tilford learns that the story was, indeed, made up.
She visits the two teachers, and tries to apologize to them, making clear that the court case will be reopened, and the two will not only be cleared of all charges but also well compensated. Karen, however, refuses to accept the apology, as she feels that the damage done to their lives cannot be undone. Afterwards, she briefly talks to Martha about her plans for the future, going somewhere far away together to start a new life. Martha, however, remains quite sullen and claims she needs to sleep.
Karen then leaves for a short walk during which Martha hangs herself. The movie ends as Karen walks away from the funeral alone with Joe watching her from the distance..