Truly takes the children home and meets their father, Caractacus Potts. The Potts patriarch shows Truly his many amazing inventions, including a new type of candy. Truly and Potts argue about how he is raising the children, and she leaves. Potts and the children prepare to eat (“You Two”). Jeremy and Jemima tell their father about Coggins’ offer to sell the car, and he promises them he will try to come up with the 30 shillings to purchase the vehicle. Later, Grandpa tries the new candy his son has invented and realizes that it can make a beautiful whistling sound.
The next day, Potts and the children pay a visit to the Scrumptious Sweet Factory, trying to sell his new candy, which he calls Toot Sweets. They run into Truly, who tries to get her father, Lord Scrumptious, to buy it (“Toot Sweets”). The candy-maker tries one, blowing on its whistle, which causes dozens of wild dogs to invade the factory. Potts and his family make a hasty retreat. Meanwhile, the two spies have raised the money to buy the car, but then realize that Coggins will never sell it to two Vulgarians. They decide to disguise themselves as Englishman (“Act English”).
Back at the windmill, Potts sings his children a lullaby (“Hushabye Mountain”), then takes one of his inventions, an automatic haircutting machine, to a local fair. There he meets Violet and her boyfriend, Sid. The machine cuts all of Sid’s hair off and he is furious! Potts tries to make his escape and gets caught up in some dancers getting ready to perform (“Me Ol’ Bamboo). Luckily for Potts, he runs into a Turkey Farmer, who wants to use his haircutting machine to pluck and cook turkey. Potts finally gets his 30 shillings and is able to buy the car. Potts sets to work fixing the car while Grandpa and the children keep the house in order (“Posh!”). Potts finishes repairing the car. Truly arrives and they all admire the gleaming car, which they name Chitty Chitty Bang Bang after the sound she makes (“Chitty Chitty Bang Bang”). They decide to go on a picnic at the seaside. Once there, Jeremy and Jemima tell Truly that they love her, and she confesses that she cares for them as well (“Truly Scrumptious”).
As the children sleep, Caractacus and Truly begin to realize that they have feelings for each other. Distracted, they don’t realize that the tide has come in and surrounded the car. And if that wasn’t bad enough, a Vulgarian ship begins to fire on them! Suddenly Chitty begins to transform into a boat-car, and they are able to escape their pursuers. Learning that Chitty can float on the water makes Baron Bomburst want the car even more.
Back at the windmill, the Vulgarians think that Grandpa is the inventor they are looking for, so they kidnap him by lifting him up in his hut with a large hook attached to an airship. Potts, Truly and the children speed after them, not realizing they are heading straight for a cliff. As they plummet to the ground, Chitty grows wings and takes flight to Vulgaria in pursuit of Grandpa!
Potts, Truly, and the children arrive in Vulgaria, secretly searching for Grandpa. The Toymaker brings them into his shop just in time, for the Childcatcher appears, sniffing the air for the thing the Baroness has banned from all Vulgaria – children! The Toymaker shows Potts where the people of Vulgaria have hidden their children – underground, in the sewers. At the toyshop the Childcatcher tricks Truly and takes Jeremy and Jemima.
The scene shifts to the Baron and the Baroness as they prepare for the Baron’s birthday party (“Chu-Chi Face”). While in the sewers, Potts is determined not only to rescue his children and Grandpa, but to put an end to the misery of Vulgaria (“Teamwork”). The Baroness describes her grand plans for the festivities (“The Bombie Samba”).
At the Baron’s party, the Toymaker nervously brings out his latest toys: two life-sized dolls. As they spring to life and begin to sing, we realize they are Truly and Potts in disguise (“Doll On A Music Box”).
The children from the sewers rise up against the authorities; the ban on children in Bulgaria is repealed, and the Toymaker banishes the Baron and Baroness from Vulgaria. The sewer children are reunited with their families, and Grandpa is rescued. Potts and Truly declare their love for one another, and along with Jeremy, Jemima, Grandpa, and Chitty Chitty Bang Bang, they all live together as one happy family.