When Nathanael returns to university, he finds that his previous lodging has burned down. However, his friends have saved all of his books and instruments and moved them undamaged into a new rooming house, which he promptly moves into. This house is directly across from that of Professor Spalanzani and provides him a view directly into Olimpia's room, where she often sits for hours gazing at him.
While Nathanael is writing a letter to Clara, a visitor comes to his door. It is Coppola, trying to sell him "eyes" - though it turns out what the man means is spectacles. He lays many glasses out on Nathanael's table until it is overflowing, and Nathanael begs him to stop as he sees eyes flickering and winking at him from inside the glasses. Coppola consents to put away the glasses, and Nathanael apparently snaps back into reality, remembering Clara and what she has said about his fear of Coppola and Coppelius arising solely from inside himself. To "make amends for his behavior," Nathanael decides to purchase something small of Coppola's wares, and chooses a small spyglass. He tests it by looking out the window and ends up staring at Olimpia for so long that Coppola must clear his throat and ask for payment. Nathanael was so fixated because he could see Olimpia's face, and especially her eyes, for the first time - he reports that it is like seeing someone whose power of vision was only just being awakened. Coppola leaves, laughing to himself, and Nathanael intends to go back to his letter to Clara but instead returns to watching Olimpia through the spyglass.
Over the next few days, Nathanael continues watching Olimpia's window, though now his ability to see her is impeded by curtains. The idea of Clara has totally left him, and he imagines Olimpia in front of him, looking at him with "radiant eyes." Soon after, there is great commotion around Professor Spalanzani's house and it becomes known that he is going to be holding a ball at which he will allow Olimpia to interact with the public for the first time.
Nathanael attends the ball. It is noted that Olimpia looks beautiful; she is described in almost exactly the same way as Clara with her "beautifully moulded features...compell[ing] general admiration" but many still noticing and being displeased by "something stiff and measured about her gait and posture." Olimpia begins her concert, playing piano and then singing opera. Nathanael is so taken with her that he looks at her through his spyglass there at the ball and cries out her name, causing people to turn and laugh. He dances with Olimpia throughout the ball, noticing her ice cold hand but noting that, like with her eyes, it seems to be suddenly coming to life. He confesses his love to her ardently, and she responds by saying "Oh! oh! oh!" She only utters this syllable throughout the story, but Nathanael seems to perceive her as saying and meaning a great deal more. He kisses her, and his mind flickers briefly to the "legend of the dead bride" because her lips are as ice cold as he first felt her hands to be, but they too warm to him. Spalanzani invites Nathanael back to visit Olimpia any time.
A friend, Siegmund, criticizes Olimpia to Nathanael a few days later, calling her a "wax doll" and noting that others feel the same way, and Nathanael has to restrain his fury. The protagonist rebuts that one doesn't have to talk a lot to be intelligent and that he is the only one who truly understands Olimpia's heart and mind. Nathanael spends more time with Olimpia and dotes on the features he feels are better in her than other women, specifically her ability to listen attentively to him for long stretches of time. Nathanael hints to Spalanzani that he'd like to ask Olimpia to marry him and the professor says that he will leave the choice up to her.
Nathanael searches for a special ring that his mother gave him when he left home with which to propose to Olimpia, casting aside letters from Clara and Lothar in the meantime. He goes to Spalanzani's house to propose and finds an incredible hubbub. From outside, Nathanael hears Spalanzani and Coppola fighting over who made "the clockwork" and "the eyes;" the men can be seen physically fighting over a female body, tugging it by the shoulders and feet, and Nathanael realizes that it is Olimpia. Coppola runs out of the building with Olimpia over his shoulder. Spalanzani raves about the time spent creating this automaton (berating Coppola, who he refers to as Coppelius, for having stolen his work) and then throws her eyes, which had fallen to the ground, so that they hit Nathanael in the chest. Nathanael is overcome by madness and several people must rush in, restrain him, and take him to the "madhouse."
The narrator speaks directly to the reader again, assuring them that Spalanzani recovered from the fight but had to leave the university due to the scandal. The narrator specifically notes that public society was quite miffed at Spalanzani for fooling them, as Olimpia has supposedly "made quite a hit" at some "respectable tea-parties." Following Spalanzani's departure, people of society attempt to assert their humanity by yawning frequently at parties and assure the humanity of their wives by allowing them to occupy themselves while being read aloud to and even to express their thoughts and feelings afterwards (which, it is noted, strengthened some relationships and caused others to dissolve).
Nathanael awakes at home after being released from the madhouse and is greeted by Clara, Lothar, and Siegmund, his friend from school. All seems well as the family has come into money through the death of a miserly uncle and Nathanael appears to have recovered and renewed his love for Clara. Clara asks Nathanael to climb the town hall to look at the mountains, while Lothar remains below. When at the top of the tower, Clara spots something in the distance and Nathanael pulls out his spyglass to look at it. Looking sideways, he sees Clara standing before the glass and begins to rave and chant as he had when Olimpia's eyes touched his chest. He grabs Clara's body to throw her off the tower, but she attempts to hold on and Lothar comes running when he hears the commotion. Lothar bursts through the tower's door, pulls his sister to safety, and punches Nathanael in the face.
Lothar rushes Clara downstairs, and from below he watches Nathanael continue yelling until he looks down and sees Coppelius standing in the crowd forming below. Nathanael then screams and throws himself off the tower, shattering his head on the pavement below. Coppelius disappears back into the crowd.
The narrative takes a final leap several years into the future, where the reader finds Clara sitting outside with her husband and two young children. The narrator remarks that the situation is good for her, and never could have come about had she married Nathanael.
The scene in which Coppola attempts to sell Nathanael glasses is an especially vivid one in the story, and a crucial point for deciding whether to trust Nathanel's perceptions and the narrator as a communicator of the story. The narrator does not entirely separate Nathanael's perceptions from the story, saying that Nathanael perceived the glasses to have eyes in them and then that he believed them not to, but not making clear what the base truth is. This happens throughout the story, creating the fantastic tone of the instability and confusion of reality, insanity, and true horror.
The foreshadowing regarding Olimpia that the narrator has been laying out through Nathanael's own perceptions, such as Nathanael noting that she can sit in front of her window extremely still and that at first her eyes looked "fixed and dead," is now taken over by all of the other party-goers. However, Nathanael plugs his ears to both his own intuition (as he still startles at her cold hand and lips, but as with the eyes is able to convince himself of their liveliness) and that of others, going so far as to argue with his friend Siegmund a few days later that it is only "poetic souls" who can understand her quiet but complex self. It would seem that Nathanael is so swayed by his desire of her as a "perfect woman" - carefully proportioned and almost entirely silent - that he is able to overlook the oddities and incompleteness of self that others fixate upon.
The comparison or doubling of Olimpia and Clara also becomes clear through the description of Olimpia at the ball, and this reveals both more about Nathanael's desires in respect to women and the realities of male gaze on women at the time. Clara and Olimpia are both described as beautiful in terms of their proportions and features, but something is missing in each that makes them not fully "beautiful." This idea of beauty and perfect womanhood is important, because it is clear that men want women to be both strict with themselves (not speaking, not yawning, thin, graceful) but need some sign of liveliness (perhaps an attractive youthfulness) to make them seem less mechanical and thus live up to true beauty.
If one believes the narrator's portrayal of the story, Nathanael is proved right in thinking Coppelius and Coppola are truly one man when he sees Spalanzani and Coppola fighting over Olimpia's body and hears Spalanzani refer to the man he grapples with as Coppelius. This creates dramatic irony upon rereading of the beginning of the story in which Clara and Lothar doubt Nathanael and chalk his discomfort with Coppola (and continued fear and perplexity regarding Coppelius and his relationship to The Sandman) up to childish fear.
What causes Nathanael's final fit of madness is not entirely clear. As it is written in the text, Nathanael takes out his spyglass to look at a bush Clara is looking at, but looking "sideways" he is surprised to see Clara in the glass. Hoffmann hasn't given the reader Clara's position in relation to Nathanael, so it is only from his shock that it might be presumed she was not sideways from him before. Other than that, all that can be gathered is that he would get a very close look at Clara, perhaps closer than he had looked before without the aid of a spyglass. He begins to rave the same things he had when he discovered that Olimpia wasn't real - "Spin, wooden dolly" - though it might be further assumed one would find, upon looking at Clara closely, less indication than ever before that she is inhuman (for example, her blemishes should be larger, her imperfect movements exaggerated). Though it is the sight of Coppelius below that sends Nathanael over the parapet, the mystery of what Nathanael perceives through the spyglass is integral to the story's ending. Because Hoffmann leaves it purposefully vague, and contrasts this moment with a final scene of Clara's domestic life years later, it may be gathered that Hoffmann's point was to underline once more Nathanael's lack of grasp on reality and inability to see and value Clara for what she truly is.