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Peter Ibbetson leads an idyllic life as a child on an estate in Paris that adjoins his best friend Mary's estate. He and Mary have a combative relationship, fighting over their toys, but also feel a profound love for each other. When Peter's mother dies, his stern uncle takes him to live in England, thereby separating the children, and leaving them both with broken hearts. As an adult, Peter is a successful architect, but has no interest in women, holding on to dreams of his childhood. When his employer urges him to take a vacation, he travels to Paris where he meets Agnes. Despite her charm, Peter is uninterested in Agnes and only has eyes for his old estate, which has fallen into disrepair. Upon his return to England, he is commissioned to rebuild stables for the Duke and Duchess of Towers. Peter has different ideas than the Duchess about the design and she asks him to leave, but decides to retain him when an inspired cartoon he draws sends her into peals of laughter. Peter and the Duchess constantly argue over his ideas, and he always gets his way, but they are delighted with each other's company and the time passes happily for both. At dinner one evening, the Duke accuses the pair of being lovers, and unable to deny that they love each other, however innocently, they discover that the Duchess is in fact Mary of Peter's childhood. The Duke angrily tries to kill Peter, but Peter kills him in self-defense and is imprisoned for life. During a fight with the guards, Peter breaks his back and is expected to die. As he lays unconscious, Mary visits him in his dreams, insisting that the communication is real and that they could live together in this dream world despite the fact that they are unable to be together on Earth. She promises to send Peter a ring the next day to prove the "reality" of the dream, then fades away. The next day, Peter receives the ring, and feels a renewed will to live. For the rest of their lives, Peter and Mary live with each other in their minds, building castles of clouds and playing in the gardens of their childhoods, seeming never to age. Finally aged in life, Mary visits Peter in their dreamland and dies in his arms. Stricken by grief, Peter haunts the empty dream world and hears Mary say that they will be together in death as well. Fulfilled, Peter dies in prison.