i nearly lost my head laughing

I think they mean her sister-in-law, Élisabeth de France, who was one of the many aristocrats who were beheaded during the French Revolution

He says I'm hanging out with Marie Antoinette and her little sister referring to the two dolls he is having tea with that have no head. He uses those names particularly because Marie Antoinette and sister in law were beheaded making them headless females... Like the dolls he is with. It would be like saying you were hanging out with spongebob and his parents whilst sitting with three sponges...

Ohhhh thanks

Nevermind, it's actually the dolls introducing themselves in a whisper. (: