NOTE: This spoiler sent in by Peter
The movie starts out with Barbara (Judi Dench) writing in her diary, whose entries are read to us by her voice over. Her voice overs occur throughout the play to discuss some key points. She writes about how its the start of the new term and how she hates the students who she teaches history to. She says that they're the future mechanics and carpenters, with one or two terrorists in the mix.
One day, she goes to a staff meeting where each teacher is presenting a report on the progress they have made. Everyone else's consists of a very thick folder, while Barbara's is a single crumpled up page. She explains that all things are doing well in the history department, with students consistently scoring lower than average on standardized tests and how she considers this consistency evidence of how good she is as a teacher. Then, Sheba Hart (Cate Blanchett) walks in late and the principle introduces her as the new art teacher.
As the term goes on, all the other teachers come to admire Sheba and always want to sit with her come lunchtime, except Barbara, who observes from afar but is madly in love with her already. One day in the schoolyard, two boys are apprehended by Barbara and Sheba for fighting. One of them is Stephen and the other is what Babara calls a "thug". Barbara sends them both off, and this is when Sheba and Barbara meet for the first time.
After that, they eat lunch together everyday and become friendly. One day, Sheba invites Barbara to come to her house for dinner. Barbara buys new shoes, a new outfit, goes to the salon, and other extravagant things to prepare for the dinner. When she shows up, Sheba's husband opens the door and invites her in. Barbara then meets Sheba's teenage daughter and her autistic son, who has just gotten a part in the school play. Barbara hates Sheba's family and comes to the conclusion that her family isn't doing Sheba any good. Later that night, Barbara writes in her diary about how it was a "gold star day" and writes an entry surrounded by tiny gold stars. Her sister walks into the room and how they have a conversation about whether Barbara has found a new "friend" ever since her old one, Jennifer. Meanwhile, her and Sheba's friendship continues and they go to the park and sit on a bench that overlooks the city where Barbara tells her about how she dreads of ending her days alone.
Some time later, the school puts together a dancing show, and Barbara is waiting for Sheba, who she has saved a seat for. When she doesn't show, she goes out looking for her. She goes to Sheba's art classroom and sees that the light is turned off. She peers in through a crack in the window and sees Sheba messing around with Stephen, the kid who got in the fight, and hiding a used condom and throwing it in the trash.
The next day, Barbara calls Sheba about the matter, and Sheba pretends to play dumb but it doesn't work. They go to a pub where Sheba tells Barbara about how it happened. In the flashback, we see how Stephen had some real artistic talent, so she invited him to stay after school and work on his drawing skills. After he put the moves on her, she stopped the lessons, but he was persistent and would keep following her home. One day he eventually spoke to her and talked about how his dad was beating him and how his mom had leukemia. Sheba tells Barbara that she cared about Stephen since he was in such a vulnerable state. Stephen eventually passes her a note during class to meet her later that night. She meets him and they end up going into a train yard where they have sex.
Back in the pub, Barbara is hurt that Sheba was already screwing around with Stephen, who is 15, before the fight between him and the other boy still happened. Sheba begs Barbara to not tell anyone until after the holidays, since she wants it to be a happy time for her family. Barbara realizes that she can gain everything by doing nothing, and tells her that she won't tell if Sheba stops the affair. Sheba promises to, and Barbara tells her that she's forever in her debt.
Sheba eventually breaks it off with Stephen, and she has a wonderful Christmas. Sheba gives Barbara a very expensive silver gift frame as a gift. Barbara spends more time with Sheba and her family, who is getting used to the fact that Barbara has become Sheba's best friend.
Some time later, Stephen eventually seduces Sheba again, and they return to their old ways of having sex and no one knowing. Barbara comes by to Sheba's house one day and they talk for a bit before she recognizes someone jumping over the fence into the property (Stephen). Barbara thinks its some thief and tells Sheba to call the cops and Sheba's pretends its just the neighbor's kid until the phone rings and Barbara realizes it's Stephen and that the affair has started back. She storms out of the house and Sheba begs for her forgiveness. Barbara yells at Sheba telling her that she isn't young and that Stephen is just going to discard her like an old rag once he's through with him.
Sheba goes to Stephen's house, and finds out that he was lying about the abusive father and the mother who has leukemia. She tells him that Barbara knows about everything, but he's the one who breaks up with her, like exactly Barbara said he would. She gets upset and calls Barbara, who comes to pick her up, their friendship renewed somehow.
Some time later, Barbara's cat, who she loves very much, must be put to sleep. Since the vet is just down the block from Sheba's, she goes to Sheba's house to ask that she come back with her to pick up the body. Sheba and her family are in the car when she arrives, and Sheba comes out and tells her that it's her son's play today and she really can't. Meanwhile, her son is throwing fits and everyone in the car is yelling for Sheba to come back in, but Barbara scolds Sheba for wanting to go back to her family and tells her to "Don't play the good mother with me!" After some pleading, Sheba eventually chooses her family and leaves Barbara on the street. Voiceover: "They always let you down in the end."
That night, Barbara gets a knock on the door. It's one of the male teachers at the school, who Barbara hates. He asks her whether or not Sheba has talked about him romantically, since he has a crush on her. Barbara uses this as an opportunity to get back at Sheba for going to her son's play and tells the male teacher that she's been hearing some "rumors" that Sheba has been messing around with Stephen. He then leaves, and Sheba is left wondering "how long it will take for her messenger to deliver the news."
Time passes, and Barbara is back at Sheba's house for a visit. All is well in their relationship now, until Barbara sees Stephen's mom and dad run up to the house and knock on the door. Knowing that the male teacher has spilled the beans, she watches as the mom comes in and punches Sheba repeatedly and screams at her and eventually goes away. She also watches as Sheba and her husband have a fight. Sheba eventually moves out of the house and moves in with Barbara. Sheba believes that Stephen told people about the affair, so Barbara is relieved.
News cameras and photographers follow Barbara everywhere she goes, while Sheba remains inside the house to stay away from the public eye. At the school, Barbara pretends to play dumb about the whole thing when the principal interrogates her. He believes she knows something, because Barbara was also "friends" with another member of the faculty, Jennifer, who eventually had a restraining order placed on Barbara. Meanwhile, Sheba notices something in the trash and digs it out, realizing its one of Barbara's journal entries. She reads it and is shocked and hurt, so she goes through the house like a madwoman trying to find Barbara's diary and tears the house apart until she finds it. Later, Barbara comes back home and is shocked to see that her house is in shambles. Sheba confronts her and tells her that what she did wasn't right (she knows everything that Barbara did since Barbara wrote detailed diary entries). Barbara yells back and says that if it was for her, Sheba would still be stuck at her stupid marriage. Sheba is shocked at this since she loves her family very much, and she shows Barbara the diaries. She tells her that she could get 2 years in prison, and Barbara says that they'll fly by and then they can live their life together. Sheba is even more shocked and pushes Barbara into an armoire. Distraught, Sheba runs outside into the mob of news reports and screams out HERE I AM!! HERE I AM like a madwoman. Barbara comes out and gets Sheba to come back in.
Later that night, Barbara is cleaning up her home and talking to Sheba, who is contemplating what has happened. Fade out to a woman on the bench in the park overlooking the city who's reading the newspaper whose headline is that Sheba got 10 months. Barbara comes in from behind and tells the woman that she knew the Sheba. The woman is surprised and asks her how she was like. Barbara lies and pretends that Sheba was a cold, mean person. She then invites her to come to a play with her later in the week and the movie ends, presumably with Barbara having a new "friend".