As the overture ends, LADAHLORD, our mysterious narrator, makes his entrance on the empty stage, quickly joined by the rest of the COMPANY (Right Before Your Eyes). The scene transitions into Painswick Orphanage, where the MATRON NURSE calls for lights out. JAMES talks in his sleep -- he is having a nightmare about his mother and father, MR. and MRS. TROTTER, who were tragically killed when a RHINO escaped from the London Zoo. As KARL KREATOUR warns the crowd about the rhino, James wakes up from the nightmare and frantically searches for his father's glasses and his mother's scarf -- his only mementos of his parents. He spots a LADYBUG and a GRASSHOPPER and sends them on their way (On Your Way Home). Suddenly, the Matron Nurse announces that James has two aunts in Dover who have agreed to take him in. They rush to catch the train to Dover as Ladahlord follows along (Right Before Your Eyes -- Reprise #1).
In Dover, VAGRANTS crisscross the stage and introduce SPIKER and SPONGE, who survive by stealing, lying, and bribing BILLY and BOBBY BOBBY-COP (Property of Spiker and Sponge). They learn that they have been named the guardians of James and quickly plan to use hime as their own personal servant. VIOLET FUNKSCHMELLER, RIDGLEY RAPSCALLION, CHRIS CRYERMOUTH and DOREEN DRIGGLES commiserate with Spiker and Sponge over their forced motherhood. They pick him up from the train station and whisk himn back to their cottage in Dover, where they inform him he will live in the basement with the rest of the creepy-crawlies. Spiker and Sponge decide on a day at the seashore, sending James inside to get the picnic basket. Meanwhile, Sponge walks directly into a spider web and catches the MALE SPIDER between two giant pieces of bread, taking a large bite out of the horrible sandwich. James returns with the picnic basket, excited to play with his friends at the beach, but Spiker and Sponge command him to chop down the tree (Right Before Your Eyes -- Reprise #2). Before beginning on the tree, James rescues a poor EARTHWORM, who is running for his life from an aggressive CENTIPEDE.
Suddenly, Ladahlord appears and offers James the chance to change his life by choosing a spell from his book (Shake It Up). The GARDEN CHORUS and INSECTS help James assemblethe potion for Crocodile Tongues. Ladahlord explains that James must add seven drops of well water and drink it up in one gulp (Shake It Up -- Reprise), but James trips and spills the entire contents of the bag. Earthworm, Grasshopper, Centipede, Ladybug, and a SPIDER each chase a crocodile tongue offstage.
The next morning, Spiker and Sponge are nursing their sunburns when they notice their is a peach in the peach tree -- a giant peach! Sponge wants to eat it, but Spiker sees some potential in the peach, inviting REPORTERS, IDA WALTERS, the LADIES' GARDEN GUILD, BITSY BOTANA, HOLLYWOOD AGENTS and BUZZ (There's Money On That Tree) to view it. James wants to move to the seashore with the money they've made, bur Spiker and Sponge don't believe him when he claims to have made the peach grow. They break his father's glasses and rip his mother's scarf, declaring that liars must sleep outside (On Your Way Home -- Reprise).
