The Squeers family retires to their own fire. The daughter Fanny doesn’t know about Nicholas, having just returned from a visit to a neighbor.
Mr. Squeers asks his wife what she thinks of Nicholas, and she says she hates him. She initially doesn’t give a reason why, but finally admits that she finds him to be proud and haughty.
Her husband reminds her that Nicholas is cheap, but Mrs. Squeers doesn’t understand why they need him—which makes him an expense they don’t need. After all, they can lie about having assistants like they lie about having a Hall. However, Mr. Squeers hired Nicholas because he wanted somebody under him. Mrs. Squeers tells him that Nicholas looked like he wanted to put a stop to the Bolder boy’s punishment.
Miss Squeers goes to have a look at Nicholas the next day on the pretense of needing a pen. She decides that she is in love with him. This is due to her best friend getting engaged at eighteen, and at twenty-three she is still single. She tells her friend she is going to be married to a gentleman’s son. She makes up things he supposedly said and adds how her parents disapprove of him. She invites her friend Matilda and her intended to have tea with her and Nicholas.
When Matilda mentions Nicholas’ humor resulting from being in love with Fanny, he laughs at how preposterous it is. He also laughs at the two silly girls’ behavior and appearance.
Nicholas has a misunderstanding with Matilda Price’s fiance John, but they reconcile. However, Fanny cries. Matilda tries to get Nicholas to console her alone. When she fails to persuade him, they all play cards. Nicholas chooses Matilda has his partner, making Fanny jealous of her friend and invoking John’s resentment.
Matilda starts criticizing Fanny’s appearance. She is getting back at Fanny for putting on airs about marrying better than her. Nicholas’ compliments gratify her ego, and it makes her fiance aware that other men find her attractive.
Matilda and Fanny get into a fight. Miss Squeers cries over losing her friend. Nicholas is confused by the whole thing and leaves her alone.