Marshall Seaver's best friend Cooper gets into some trouble with the police for selling counterfeit Yankees tickets. As a result Coop's parents (Mr. & Mrs. Foley) take him to their lake house for the summer. Marsh's Dad is set to leave for Vegas on a business trip, and he will be home alone for a week (his mother passed away 2 years earlier). After an argument with his father, Marsh throws a gold ball that belonged to his mother against a wall; when it shatters, it leaves blood on the wall. When he tries to show his father, the blood is gone.

When his father leaves, he begins to see strange things in the house (he hears someone knocking on the wall, and then sees a ghost white face in the window). He also sees a pattern of three spirals formed in ovaltine. The next day, he has trouble focusing at work, and then receives a phone call saying he left some sketches at the school. He returns, but the school is empty. Strangely, his cat is there; he follows his cat into an abandoned gymnasium where he is attacked by Gravedigger, a character Marsh created for a graphic novel. He sees the spiral symbol in shattered glass. He escapes nearly dying, and returns home. That evening, he has a vision of a past Christmas in his house. It is interrupted by ornaments bursting into blood and another Gravedigger attack. He decides to go to the Foley's to get the phone number of the lake so he can tell Coop what is happening.

When he arrives, only Sydney (Coop's beautiful, aloof sister) is there. Marsh tells her everything, but she doesn't believe him until he shows her the symbol. It is of a tattoo that she got that only Coop knows about. She thinks Coop put Marsh up to this until she sees how scared Marsh is. They call the lake, only to discover that Coop has gone missing (something not entirely out of character for Coop). She lets Marsh stay in Coop's room that night. When Coop still hasn't shown up the next day, Sydney agrees to take Marsh to the lake. Before they leave, Coop is threatened by Sydney's boyfriend Mikey Russo. It turns out he is the source of the counterfeit tickets. Just when he is about to attack Marsh, however, Mikey runs away as though something were attacking him (though Sydney and Marsh couldn't see anything).

That evening at the lake house, Marsh sees Coop outside the living room window. He follows him out onto the dock, only to discover it is actually Gravedigger. His only escape is into the water. Gravedigger catches him and begins to drown him. At the last minute, he is saved by Sydney. She was woken up by a breeze, and her window unnaturally opening and closing. When she went to the window, she saw Marsh drowning.

The next day, Marsh sees an old man wearing Coop's jacket. The man warns him not to tell anyone what he's seeing, and then gives him a key before running into traffic and getting hit by a car. Sydney joins Marsh on a trip to George O's (the old man) house. There they find a piece of the fishing boat that belongs to the Foley's, thanks to the guidance of a spot of light. Coop was planning on taking Britt (a girl who worked at the Lake Marina) out on it to look at the stars the night he disappeared, but she didn't join him.

Sydney and Marsh investigate the boathouse, where they find Coop's shoes, which proves he did take the boat out and not return it (he never wears shoes when he's on a boat). While there, the building is filled by a tidal wave of blood. The guiding light returns, however, and helps them escape. Sydney, completely freaked out, stays at home. Marsh heads back to town to continue investigating. He is picked up by a cop who goes crazy and tries to kill them by driving off the road. They survive, but the cop is mentally broken. Marsh continues to the town, now empty, and heads to the Marina. He and Britt check out a speed boat that is in for repair. They see blue paint among the damage, the same color as Foley's boat.

The speed boat belongs to a rich kid who is having a birthday party on the marina party boat. Britt goes to call the state police. Meanwhile, the kids father (Mr. Reilly) confronts Marsh. When Marsh accuses his son of hitting Coop's boat, the man attacks Marsh. Reilly appears to be possessed by Gravedigger. Marsh escapes, and is joined by Sydney. She and Marsh race to the party boat before Cayden (the rich kid) can leave. Once there, Cayden realizes he is about to be caught and leaves to get to the sea plane that will take him home. Sydney and Marsh, however, are cut off by Reilly driving the speed boat. They are chased around the lake by Reilly, and Gravedigger. They realize Gravedigger's boats are just illusions and are able to shoot a flare off to stop Reilly. It is magically diverted to be a perfect shot, and Reilly drives into the sea plane, dying as a result.

Cayden confesses to running over the fishing boat and tells everyone where it happened. The next day they begin the search. Marsh realizes in the night, however, that Coop is dead, and the beneficent spirit (the light that guided them), was Coop all along. They find the Coop's body at the bottom of the lake. After the funeral service, Sydney and Marsh are attacked by Gravedigger. Marsh learns that Damon is the real evil spirit, though, and Gravedigger was just meant to scare Marsh. Damon tells Marsh he must find the poleax or walk the Morpheus Road; go to the Black. Marsh refuses when Coop's spirit shows up and intimates Marsh must not listen to Damon. Damon, it turns out, is powerless to physically harm Marsh. He and the illusion disappear. Coop tells Marsh he will continue to help him stop whatever this is.

Ennis, an old friend of Marsh's mom, shows up and asks him if he broke the Crucible (this is what the gold ball filled with blood was from the beginning). It was a protection left by his mother. Ennis gives Marsh his own crucible. He and Sydney hug (they kissed earlier) and decide to do this together. The epilogue is an epistle written by Coop saying you will believe in ghosts once you read his story.