Back home, Li's family suffers the consequences of his defection. Communist Party officials visit the family home intent of shaming the family. Li's mother, distraught and protective of him, blames the party for taking her son away. Li tells Ben of his plan to move to Florida with Elizabeth and Ben convinces him to stay in Houston, with what family he has here. Li continues to have nightmares about his family and the consequences of his actions. Li and Elizabeth's relationship deteriorates.
Returning to the water, Milika, Botj and Lorrpu find a campsite. Inside the camp they notice evidence of disrespectful occupants. Stealing the camp's boat, the boys work together to catch their first turtle. After eating it, Lorrpu places pieces of shell and bones into the fire. Lorrpu explains it is in respect of the old people. As they walk across country Botj begins singing their song line. Together they embrace their journey and rediscover Yolngu knowledge.
Lorrpu dreams of his childhood with Botj and Milika; of their hunts together and the time they were initiated. Milika pulls Lorrpu out of his dream. Milika has grown into a great football player and is invited to ceremony by Yolngu elder, Dawu. Botj is collected from jail by his uncle, Matjala, who asks about his absent father. At the game Botj gets into a fight, almost hurting Milika. Jail has changed Botj and the progression of their friendship.
Matjala questions Lorrpu when he arrives at the hospital. Lorrpu sings by Botj's side, waiting to see if he will be okay. Lorrpu finds Milika at the oval to tells him the news, but Milika doesn't care. A love interest between Darwu's granddaughter and Lorrpu develops. The elders remind Milika and Lorrpu of their responsibilities as dirramu (men). Lorrpu devises a plan to help his friend Botj, and Milika comes through in the end.
Botj goes to see Darwu, and determine his future. That night, he tells of getting jailed for pretending to be on turtle hunt, the boys laugh. The next day Botj visits his father, finding him drunk and unable to recognise Botj. Lorrpu and Milika plead Botj's case to Darwu. Botj, caught between two worlds, turns to bad habits. Milika and Lorrpu come to an understanding about their own futures. Botj's body is found washed up below the bridge.
The boys set out for Darwin, with only themselves, their memories and their hopes. Lorrpu leads the group, entreating the others to trust him and their cultural knowledge. Back home in north-eastern Arnhem Lab, Matjala reasons with police to give him a chance to find the boys first. Bäru Dirramu (crocodile man) visits Botj, Milika and Lorrpu as they dream.
Botj watches Milika and Lorrpu's ceremony into manhood. Afterwards, he goes to see his estranged mother. The next day, envious of Milika and Lorrpu, Botj pressures them into breaking into the local store. Botj gets into a fight with Lorrpu. Feeling isolated and angry, Botj decides to get high. Memories of Bäru (crocodile) initiation and anxieties about his future flash through his mind and he spins out of control, trashing the Youth Centre.
Lines from Edgar Allen Poe's 1849 poem A Dream Within a Dream, “what we see and what we seem are but a dream; a dream within a dream” is whispered by the narrator. The introduction of Allen Poe, famous for his mysterious and often macabre stories, situates the enigmatic, dream-like qualities that punctuate the film and suggests the incompatibility of Victorian ideals and the Australian landscape.
Miss Appleyard asks if Sarah has memorised the assigned poetry, Sarah remarks she has not because the poem makes no sense, suggesting she recite a poem she wrote to St Valentine. Realising the poem is about love, Miss Appleyard reprimands Sarah and insists she recites the assigned literature. Sarah declares she cannot learn it, refusing to answer why. Miss Appleyard leaves her to study, and Sarah thinks of Bertie and Miranda. The scene suggests the repression of nuanced sexual identity in Victor
Already picnicking is young Englishman Michael Fitzhubert, his uncle and aunt and their driver, Albert. The young Fitzhubert and Albert share a drink, although social status divides them. The girls arrive at their picnic site and toast to St Valentine before slicing a cake. The scene portrays a sense of foreboding in its use of cinematography, sound and repressed sensuality.
Fitzherbert attempts to map his location using paper markers, but the beguiling landscape and prehistoric atmosphere overcome him, and he falls asleep. As he sleeps, he senses the girls' whereabouts but is incapable of reaching them. Albert returns to the rock in search of Fitzhubert, finding him injured and changed. While Fitzhubert sits in the wagon he slips Albert a clue. Realising it relates to the girls, Albert runs up the outcrop, following the paper markers. At the peak, Albert discovers
Sara builds a shrine to Miranda and Mlle. De Poitiers worries about her emotional state. Later, Mlle. De Poitiers brings Irma into the dancing class to say goodbye to the other girls. The girls, including Edith, become hysterical and yell at Irma for her lack of information. Mlle. De Poitiers then discovers Sara tie to the wall, an action the class teacher defends as for her own good.
A doctor inspects Irma and concludes that she is "intact", but remains baffled by her injuries. Later, the school maid discovers a clue but does not dare relay the information to the male inspectors, as it would be improper. The case is hindered by Victorian society's repression of gender and any suggestion of sexuality.
The girls reach and open peak on the rock. One of the girls teases Sarah for her poetry dedicated to Miranda; Miranda reminds them that Sarah is an orphan. Iran tells the girls of a doomed dear she once looked after.
Edith awakes from a nap to find the girls have removed their shoes and are wandering further into the rock. Marion and Miranda ponder the purpose of the world. The girls lay in the open air and creatures and bugs wander around them. The hypnotic music and rhythm of the cinematography of the environment to suggest the girls are beginning to entangle with Hanging Rock. When they wake, Miranda and the others start moving further into the outcrop, unresponsive to Edith's cries.
Albert and Fitzhubert watch the girls from afar. When Albert makes a crude remark Fitzhubert asks him to stop, and Albert responds, "I say them, you just think them". Albert then tells Fitzhubert about his childhood in an orphanage. Fitzherbert is captivated by the girls' angelic presence. Tension builds as the girls venture further into Hanging Rock's labyrinthine formation. Edith becomes upset but follows the girls into the dark recesses.
The driver points out Hanging Rock and Miss McGraw delivers an eerie monologue about its the geological history. In response, a young girl quips it has been waiting a million years "just for us".
Appleyard's carriage driver Ben Hussey realises his watch has stopped at 12 o'clock, as has Miss McGraw's. Miranda, Marion, Irma and Edith are permitted to explore the rock. Miranda waves goodbye to Mlle. De Poitiers. Strong imagery of the natural environment is mixed with references to classic European paintings, giving the film a mesmerising and hypnotic quality.