It is Christmas Eve at the Stahlbaum house. The Stahlbaums are hosting their annual Christmas party, welcoming the arrival of their family and friends. The children, Clara and Fritz, are dancing and playing as they welcome their friends too. The party grows festive with music and dance as godfather Drosselmeyer arrives. He is an entertainer and always full of surprises. Drosselmeyer draws everyone's attention as he presents a group of dancing presents and two life-size dolls. They are the delight of the party, each taking a turn to dance.

The children begin to open gifts when Drosselmeyer presents his gifts to Clara and Fritz. Although his gift to Fritz is quite nice, he gives Clara a beautiful Nutcracker that becomes the hit of the party. Fritz becomes jealous and, having a bit more spunk than a boy should have, grabs the Nutcracker from Clara and promptly breaks it. Clara is heartbroken looking on as Drosselmeyer quickly repairs the Nutcracker with a handkerchief he magically draws from the air. As the evening grows late, the guests depart and the Stahlbaum family retires for the evening. Clara, worried about her beloved Nutcracker, sneaks back to the tree to check on him, falling asleep with him in her arms.

The Nutcracker turns into a Prince and takes Clara on a journey to the Land of Snow, an enchanted forest wonderland where they are welcomed by dancing snowflakes.