But some of the town bullies push him around and the key falls to the ground. Swanilda and her girl friends appear, find the key, and, under Swanilda's urging, sneak into the house of the toymaker. As the curtain closes, Franz starts to climb up. Nervously, Swanilda and her companions enter the dimly lighted room. They soon discover that the object of Franz's admiration is no more than a mechanical doll.
All fear is gone now and the girls dance merrily, setting all the life-sized dolls in motion.
Franz tries to make his way back to the window, but the old man bars his way and demands an explanation. He offers one to Franz, and then, unobserved, throws away the contents of the other on the floor. Franz slumps over on the table in a stupor. He tries to draw the life force from Franz and then to transfer it to the doll. The final preparations for the village festival are in progress, a pageant to celebrate a new bell for the church.