It is December 23rd in a small town somewhere - not too long ago. As darkness falls, distant sleigh bells are heard, accompanied by the faint chattering and giggling of many high pitched elfin voices. After a moment, a tall, mysterious figure in a long, dark cloak enters, nods, gives a signal, then departs. Suddenly a group of unusual, energetic little beings dash in, and within moments, these elf-like creatures transform a deserted storefront into a colourful and fully-equipped toyshop. 

The next morning the townspeople are amazed at the sudden appearance of a toyshop, and many curiously investigate. A sign over the door identifies the proprietor as "Nicholas S. Claus." His assistant, Nix, has pointed ears and shoes and speaks to the toys as though they were alive. Although Claus and Nix are terribly busy, they do take time to make friends with some of the people of the town. Mr Tompkins, a minor public official, is a quiet, gentle, man, who would love to have a toyshop of his own. When he asks to work in the shop, Claus gladly accepts his help.  

Claus also takes time to befriend two young orphans, Michael and Jennifer. Vowing to find a way to ease the sad plight of this brother and sister, he is aided by the arrival of a mysterious spirit, who dances gracefully, but does not speak. 

Claus permits Michael and Jennifer to work in the shop; each wants to earn a present for the other. Later on Christmas Eve, he sends them home to rest, but they sneak back into the shop, wanting to investigate some of the odd things they noticed in the workroom; a map of the whole world, lots of long lists-and some strange looking animals out in the stable. But then - when the toys come to life, and Claus appears in a red, fur-trimmed suit and hat, Michael and Jennifer find out who he really is. Then Claus and Nix take care of last-minute adjustments, assign homes to the new toys, and finally, after a grand celebration, it's time to go. The toys are packed, farewells said, and Claus leads them all away. 

But when Michael and Jennifer awaken in the deserted shop, they discover that Claus has left behind two very special presents, as well as one final gift for them both, thus fulfilling his vow to provide them with an opportunity for a happier future.