Nicholas and Smike leaves the theater company and return to London. He's no sooner arrived than he hears Sir Mulberry Hawk in a dining hall making objectionable remarks about his sister Kate. An argument ensues and when Hawk tries to leave in his carriage, a accident ensues causing severe injury. Meanwhile, Wackford Squeers and his son Wackford Jr. arrive in London intent on locating Smike. When they find, the poor lad is locked in a pantry. Nicholas has the good fortune of meeting Edwin and Charles Cherryble who not only offer his a well paying job but the use of a cottage at a very reasonable rent.

Smike escapes with the help of an old friend and makes his way to Newman Noggs' lodgings where he is reunited with Nicholas. It doesn't stop his Uncle Ralph from trying to force Smike's return to Wackford Squeers. Nicholas is bowled over by the beautiful Madeline Bray who cares for her ill and spendthrift father. Ralph Nickleby is soon party to a scheme to marry off Madeline to a elderly gentleman who will pay all of her father's debts, including the considerable sum owed Ralph. Sir Mulberry Hawk returns to London intent on seeking revenge against Nicholas. Kate meanwhile meets the the handsome young Frank Cheeryble.

Madeline's wedding day arrives and her father is having second thoughts. Ralph Nickleby pushes him to keep his obligations. She is a dutiful daughter and will obey her father, but fate intervenes. Smike is deathly ill and needs to be removed from London, perhaps to the countryside where he could benefit from fresh air and warmth. The doctor warns them however that Smike may never return. Mrs. Nickleby shocks her son by suggesting the Frank Cheeryble has fallen in love with Kate. Madeline may be an heiress but Noggs will have to move quickly if Ralph and Queers are to be prevented from stealing it from her. Ralph Nickleby also has to deal with Brooker, who has shocking news for him. He meets a much deserved end while Nicholas, Kate and their friends enjoy bright futures.