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Unable to accept the untimely death of her young daughter Katherine, wealthy widow Rosie Forrest cradles the dead girl's moldering skeleton and holds séances conducted by Mr. Benton, a fraudulent medium with a fondness for brandy. One night, while seated at a table with Rosie and her butler, Albie, Benton conjures the voice of Katherine and Rosie begs for the girl's forgiveness, pleading for another chance. Meanwhile, at the local orphanage, stern headmistress Miss Henley chastises orphan Christopher Coombs for being an inveterate liar who invents fantasies about witches and phantoms to frighten the younger children. Every Christmas, Rosie invites eight children from the orphanage to spend the holiday at her estate, Forrest Grange, dubbed the "gingerbread house" by the children for its fanciful exterior. Miss Henley selects the invited children on the basis of their exemplary behavior, and as a result, Christopher and his young sister Katy are excluded from the festivities. Christopher and Katy stow away in the trunk of the car ferrying the orphans to Forrest Grange, but when they try to sneak in, they are apprehended by Albie, who terrorizes them by threatening them with a knife, then turns them over to Miss Henley and Rosie. Although Miss Henley is angry, Rosie welcomes the children, and later, as she passes out cookies and treats, asks them to call her "Aunt Roo" and regales them with stories about how she gave up her career as a music hall entertainer to marry her late husband, a great magician. After the children retire to their beds for the night, an ornament rolls down the stairs, attracting Rosie's attention. When Rosie goes to the stairway, she sees Katy at the top of the banister, poised to slide down. The sight of Katy on the banister panics Rosie, who then recalls an incident, years earlier, when Katherine fell to her death while sliding down the same banister. When Katy makes it to the ground without incident, Rosie puts her to bed, after which Christopher begins to tell her a bedtime story about Hansel and Gretel. Later, as Benton conducts another séance to reach Katherine, Katy hears him call Katherine's name and goes downstairs to investigate. Christopher follows her into the hallway and traces the voice to a locked service closet. Behind the locked door, Rosie's maid Clarine, who is in league with Benton and Albie to defraud Rosie, impersonates the voice of Katherine. Downstairs, when Katy interrupts the séance, Rosie becomes disoriented and momentarily mistakes Katy for Katherine. After overcoming her confusion, Rosie retrieves some money to pay Benton from a locked drawer, which Katy notices is filled with jewels. Seeing Katherine's stuffed teddy bear propped up on a chair, Katy asks if she can sleep with it. Handing Katy the bear, Rosie takes her upstairs, where they find Christopher standing outside the service door. When Christopher tells of hearing voices from behind the locked door, Rosie opens the now unlocked door and shows the boy the empty room. That night, as Katy sleeps, Rosie, wearing a heavy black veil, enters her room and removes the bear. The next morning, an ecstatic Rosie bounds into the siblings' room and announces that she wants Katy to live with her. Christopher hostilely remarks that Katy lives with him, and after Rosie leaves, he repeats a line from Hansel and Gretel , warning that Rosie plans to fatten up Katy to make a "dainty morsel." As the children gather around the tree to receive their Christmas presents, Rosie hands Katy her gift, a new teddy bear, disappointing Katy who prefers the old bear. Later, as Rosie entertains the other children, Katy sneaks off and finds the old bear and the drawer filled with jewels just as Rosie bursts in and demands that she return the bear. When Rosie relents and allows her to keep the toy, Katy says she loves her. That night, as Katy sleeps, Christopher is awakened by Rosie's singing. Following the voice to the service room, Christopher stumbles upon a dumb waiter leading to the nursery room. Climbing into the dumb waiter, Christopher pulls himself up to the nursery, where he sees Rosie, dressed in a heavy veil, pick up a skeleton from the crib and place it in a coffin. The next morning, as the children assemble to return to the orphanage, Miss Henley discovers that Katy is missing. When Rosie promises to send back Katy as soon as she finds her, Christopher tells Miss Henley about Rosie's "mummy," but no one will believe him and he is forced to leave with the others. Once the children have departed, Albie insolently orders Rosie to write him a check for £2,000 and threatens to tell the police that she has kidnapped Katy and locked her in the nursery. Albie then coldly informs Rosie that he was in league with Clarine and Benton to defraud her and that he and Clarine are leaving. That evening, Christopher sneaks out of the orphanage and into Rosie's house, where he locates the drawer of jewels that Katy had told him about. Taking the dumb waiter to the nursery, Christopher finds Katy, who happily declares she wants to stay with Rosie. When Christopher convinces Katy that Rosie is a witch, Rosie leads him through a secret panel that connects to Rosie's closet, allowing the children to escape. They are stopped at the front door by the veiled Rosie, cackling that they will now live with her forever. The following morning, the police come to search for Katy, and Rosie, insulted that they suspect her of kidnapping, throws them out of the house. Meanwhile, in the nursery, Christopher stuffs the jewels he has stolen into the teddy bear. After locking the children in the nursery, Rosie cuts the ropes to the dumb waiter, shrieking that she will not be abandoned. Pulling Christopher out of the nursery by his ear, Rosie puts him to work gathering wood as she sharpens knives to prepare a succulent roast. Although Rosie has secured all the house keys on a tall rack out of Christopher's reach, Christopher tricks her and manages to grab the key to the nursery. There, as Christopher tells Katy that Rosie is concocting a stuffing with which to roast them, Rosie discovers that the key is missing and runs to the nursery. Chasing them to the locked kitchen door, Rosie shoves them into the pantry and bolts the door. Returning to the nursery, Rosie opens Katherine's casket, but when she picks up the skeleton, it crumbles in her hands. Back in the kitchen, Rosie is hacking potatoes with a cleaver when Katy, coached by Christopher, calls her mommy and begs her to open the door. When Rosie enters the pantry, Christopher, perched on a shelf, knocks her down by pushing some large cans onto her, allowing the children to escape. After they lock the pantry door, Rosie slashes at it with a hatchet, prompting Christopher to pile some logs in front of the door and set them on fire. As the fire spreads throughout the house, the children retrieve the jewel-filled bear and run out the door just as Mr. Harrison, the butcher, pulls up to deliver a pig. Although Harrison hurries to summon the fire brigade, by the time they arrive, Rosie has perished. As the driver takes the children back to the orphanage and worries that they will have nightmares until the day they die, Christopher and Katy just smile.