It is Christmas Eve. Family and friends have gathered in the parlor to decorate the beautiful Christmas tree in preparation for the night’s festivities. Once the tree is finished, the children are sent for. They stand in awe of the tree sparkling with candles and decorations.
The festivities begin. A march is played. Presents are given out to the children. Suddenly, as the owl-topped grandmother clock strikes eight, a mysterious figure enters the room. It is Drosselmeyer, a local councilman, magician, and Clara’s godfather. He is also a talented toymaker who has brought with him gifts for the children, including four lifelike dolls who dance to the delight of all. He then has them put away for safekeeping.
Clara and Fritz are sad to see the dolls being taken away, but Drosselmeyer has yet another toy for them: a wooden Nutcracker carved in the shape of a little man, used for cracking nuts. The other children ignore it, but Clara immediately takes a liking to it. Fritz, however, purposely breaks it. Clara is heartbroken.
During the night, after everyone else has gone to bed, Clara returns to the parlor to check on her beloved Nutcracker. As she reaches the little bed, the clock strikes midnight and she looks up to see Drosselmeyer perched atop it in place of the owl. Suddenly, mice begin to fill the room and the Christmas tree begins to grow to dizzying heights. The Nutcracker also grows to life-size. Clara finds herself in the midst of a battle between an army of gingerbread soldiers and the mice, led by the Mouse King. The mice begin to eat the gingerbread soldiers.
The Nutcracker appears to lead the gingerbread soldiers, who are joined by tin soldiers and dolls who serve as doctors to carry away the wounded. As the Mouse King advances on the still-wounded Nutcracker, Clara throws her slipper at him, distracting him long enough for the Nutcracker to stab him.
The mice retreat and the Nutcracker is transformed into a handsome Prince. He leads Clara through the moonlit night to a pine forest in which the snowflakes dance around them.