At a school called state school 5, a teacher named Miss Walker tells some children a version of E. T. A. Hoffmann's ''The Nutcracker and the Mouse King'', involving the Care Bear Family. As the story begins, the Care Bears and their Cousins prepare for Christmas in their home of Care-a-lot; the two youngest bears, Hugs and Tugs, are searching for an ornament. While the others spend time in the Hall of Hearts decorating a tree, Funshine alerts them of an unhappy girl named Anna. Enlisting Grumpy Bear to go along, she takes a Cloud Mobile down to Earth.