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.

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.

Following the death of his father, young Nicholas Nickleby travels to London with his mother and his sister Kate in hopes that Uncle Ralph might be in a position to offer some assistance. However, Ralph had little contact with his brother's family and feels no sense of obligation. A hardhearted businessman not at all surprised that his brother died penniless, his offer to Nicholas is to help him secure a not-so-ideal teaching position which Nicholas manages to obtain with Wackford Squeers. As for Kate, her uncle arranges a position with a dressmaker.

In London, Kate Nickleby has settled in quite well into her new job. She acts as hostess at her uncle's dinner party but is unprepared for the advances of one of the guests. After his conversation with Nicholas the previous night, Smike has run away from Dotheboys Hall. Nicholas is invited to tea by Miss Fanny Squeers but is shocked when her friend tells him Fanny thinks he's in love with her. When Smike is forcibly brought back to the school and given a severe beating, Nicholas lashes out at giving a severe thrashing. Nicholas sets off back to London with Smike accompanying him. He calls on his uncle Ralph's clerk Newman Noggs who had previously offered to help him should the need arise. When his uncle receives a letter from Mr. Squeers about the incident, he decides that young Nicholas needs to be taught a lesson.

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.

Nicholas seeks out the assistance of his uncle's clerk Newman Noggs who quickly arranges a position for him as a French tutor. With his mother and sister faced with eviction by his Uncle Ralph however, Nicholas opts to leave London. He and Smike head to Portsmouth thinking they may get work on a ship. He soon meets Vincent Crummles who suggests that the handsome young Nicholas consider a career on the stage. In London meanwhile, Kate is making her mark with the Mantalinis but Mr. Mantalini's wastrel ways have finally caught up with him and they go bankrupt. Of far more concern to Kate however is the fact that Lord Frederick Verisopht and Sir Mulberry Hawk now know where she lives and are pursuing their advances.