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Nineteen-year-old Lily Mars of Midhaven, Indiana, wants desperately to become an actress, and convinces neighbor Mimi Thornway to introduce her to her son John, a Broadway theatrical producer.  When John, who is in town with the touring show of his latest production, learns about Lily, however, he refuses to meet her, sure that she is just another rank amateur.  Undaunted, Lily steals John's annotated copy of Let Me Dream, his next play, and then tells him that he can pick it up at her house.  To John's dismay, Lily forces him to watch her mawkish rendition of "Lady Macbeth's" soliloquy before returning his script.  Although John angrily advises Lily to give up her acting dreams, Lily remains determined to prove her talent.  To that end, she and her youngest sister Poppy dress in rags and stand outside John's study, reciting lines from a Victorian melodrama.  Lily's performance is also witnessed by Russian-born actress Isobel Rekay and Let Me Dream playwright Owen Vail, who have dropped by to see John on their way to the theater. Hearing Poppy yelling "Papa, Papa" at an annoyed John, Owen and Isobel, with whom John is romantically entangled, assume the worst.

Later, when Lily crashes John's post-show party, Owen offers to help her confront the producer with his "misdeeds."  John soon straightens out Owen and Isobel and begins chasing Lily around his house, determined to make good on his threat to spank her if she ever again bothered him.  Lily momentarily distracts John by singing a swing number with the hired band, then agrees to leave peaceably.  Before going, however, Lily informs John that he acts hastily toward her because he is afraid of his attraction to her.

Despite her bravado, Lily breaks down in tears as soon as she arrives home and is comforted by her three sisters and brother.  Lily's kind mother Flora, a hat maker, then advises her to follow her dream and go to New York.

By the time Lily arrives there, having hitchhiked the entire way, John is already rehearsing Let Me Dream.  Lily manages to sneak into John's theater and hides out undetected until she is discovered by charwoman Frankie.  Former actress Frankie confesses that she, too, came to New York as a starry-eyed youth and reassures Lily that, no matter what happens, she belongs on Broadway.

The next day during rehearsal, Lily reveals herself to John when she starts dancing with the show's chorus line and faints from hunger.  A suddenly sympathetic John treats Lily to lunch and allows her to remain in the chorus.  After John arranges a boardinghouse for Lily, Isobel, sensing John's growing interest in the young woman, complains about the play's third act.

While Owen and John are rewriting the act one night, Lily shows up at the theater and suggests her own ending.  John and Owen incorporate Lily's ideas into the revised act and, despite Owen's warnings that he is getting too involved with Lily, John casts her as Isobel's maid.

Two weeks later, Isobel drops by the same nightclub to which John, who is now smitten with Lily, has taken her and watches in horror as Lily imitates her on the club's stage.  After a jealous Isobel quits the next day, John announces he is closing the show.  Lily insists that she can take over Isobel's part, and blinded by his love for her, John agrees to cast her.  Lily founders in the demanding role, however, and just before the play is to open, John reluctantly informs her that he is replacing her with Isobel, with whom he has made peace.  John advises Lily not to give up, but to stay with the show in her original, modest part.  Lily is crushed by John's decision and tells her family, who have come to New York to see her in her first starring role, that she is a failure.  The Mars family showers Lily with love and support and, to John's relief and delight, Lily makes her entrance as the maid.

Sometime later, as John watches with pride, Lily makes another entrance, but this time she is a full-fledged star.