Michael Dorsey is a respected actor, but nobody in New York wants to hire him because he is a perfectionist and difficult to work with. After many months without a job, Michael hears of an opening on the popular daytime soap opera Southwest General from his friend and acting student Sandy Lester, who tries out for the role of hospital administrator Emily Kimberly. In desperation, he impersonates a woman, auditioning as “Dorothy Michaels”, and gets the part. Michael takes the job as a way to raise $8,000 to produce a play, written by his roommate Jeff Slater, which will star himself and Sandy. Michael plays his character as a feisty feminist, which surprises the other actors and the crew, who expected Emily to be (as written) another swooning female. His character quickly becomes a national sensation.
When Sandy catches Michael in her bedroom half undressed because he wants to try on her clothes in order to get more ideas for Dorothy’s wardrobe, he covers up by claiming he wants to have sex with her. Exacerbating matters further, he is attracted to one of his co-stars, Julie Nichols, a single mother in an unhealthy relationship with the show’s amoral, sexist director, Ron Carlisle. At a party, when Michael (as himself) approaches Julie with a pick-up line, to which she had previously told Dorothy she would be receptive, she throws a drink in his face. Later, as Dorothy, when he makes tentative advances, Julie—having just ended her relationship with Ron per Dorothy’s advice—makes it known that she is not a lesbian.
Meanwhile, Dorothy has her own admirers to contend with: older cast member John Van Horn and Julie’s widowed father Les. Les proposes marriage, insisting that Dorothy think about it before answering. When Michael returns home, he finds John, who almost forces himself on Dorothy until Jeff walks in on them. Later, Sandy visits Michael, asking why he hasn’t answered her calls. Michael admits he’s in love with another woman, and Sandy screams and breaks up with him.
The tipping point comes when, due to Dorothy’s popularity, the show’s producers want to extend her contract for another year. Michael finds a clever way to extricate himself: when the cast is forced by a technical problem to perform an episode live, he improvises a grand speech on camera, pulls off his wig and reveals that he is actually Edward, the character’s twin brother who took her place to avenge her. The revelation allows everybody a more-or-less graceful way out. Julie, however, is so outraged that she punches him in the groin once the cameras have stopped rolling, before storming off.
Some weeks later, Michael is moving forward with producing Jeff’s play. He also gives Les back his ring, and Les tells Michael: “The only reason you’re still living is because I never kissed you.”
Michael later waits for Julie outside the studio. She is reluctant to talk to him, but finally admits she misses Dorothy. Michael tells her, “I was a better man with you as a woman than I ever was with a woman as a man.” She forgives him and they walk down the street.