In their hotel room, the wacky Jerry/Daphne gleefully reports to Joe-sephine about how enamoured he is about going up the aisle. Osgood has proposed marriage after a night of liberating tango dancing. Euphoric as he lies on his bed still in drag dress, he is impressed with his new sexy image as a woman - his repressed alter ego - in which he has found a whole new side to his personality. He is ecstatic about Fielding's promise of financial "security" through regular alimony payments. He shakes a pair of maracas for emphasis after each outrageous line (and to provide 'laugh time' by the audience):

Jerry: I'm engaged!
Joe: Congratulations. Who's the lucky girl?
Jerry: I am. (He sings and vigorously shakes maracas.)
Joe: What?
Jerry: Osgood proposed to me. We're planning a June wedding. (He sings, dances, shakes.)
Joe: What are you talking about? You can't marry Osgood!
Jerry: You think he's too old for me?
Joe: Jerry, you can't be serious.
Jerry: Why not? He keeps marrying girls all the time. (sings, dances, shakes)
Joe (wondering): But, but, you're not a girl. You're a guy. And why would a guy want to marry a guy?
Jerry: Security! (sings, dances, shakes)
Joe: Jerry, you better lie down. You're not well.
Jerry: Will you stop treating me like a child? I'm not stupid. I know there's a problem.
Joe: I'll say there is.
Jerry: His mother. We need her approval. But I'm not worried because I don't smoke. Ha ha ha ha! (sings, dances, shakes)
Joe: Jerry, there's another problem. Like what are you gonna do on your honeymoon?
Jerry: We've been discussing that. He wants to go to the Riviera, but I kinda lean towards Niagara Falls. (sings, dances, shakes)
Joe: Jerry, you're out of your mind. How are you gonna get away with this?
Jerry: I don't expect it to last, Joe. I'll tell him the truth when the time comes.
Joe: Like when?
Jerry: Like right after the ceremony...then, we get a quick annulment, he makes a nice settlement on me, and I keep getting those alimony checks every month.
Joe: Jerry, Jerry, listen to me, there are laws, conventions. It's just not being done.
Jerry: Shhh, Joe! This may be my last chance to marry a millionaire.

Joe attempts to persuade Jerry to come back to reality and realize that he can't marry Osgood. He reverses his previous advice to him about being a girl, since Jerry has convincingly begun to think of himself as a woman:

Joe: Just keep telling yourself you're a boy. You're a boy.
Jerry: I'm a boy.
Joe: That's the boy.

Osgood has given Daphne an expensive bracelet for an engagement present. When Joe asks if the diamond bracelet that he has received is genuine or fake, Joe is told that the diamonds are real: "Of course they're real! What do you think - my fiance is a bum?" In his own mind, Joe has found the perfect present for Sugar.

Spats [his white spats are viewed first] and his mob arrive at the hotel from Chicago as delegates for the 10th Annual "Friends of Italian Opera" gangster convention and banquet, trailed there by Sergeant Mulligan as suspects in the garage massacre. When Spats passes by a slick young gangster named Johnny Paradise (Edward G. Robinson, Jr. - the son of one of his greatest film rivals) flipping a coin, he grabs the coin in mid-air - he refers to his signature, coin-flipping role from the classic gangster-crime film Scarface (1932):

Where did you pick up that cheap trick?

Daphne and Josephine walk into the lobby of the hotel while talking about their multiple masquerades:

Jerry: I feel like such a tramp, taking jewelry from a man under false pretenses.
Joe: Get it while you're young. You'd better fix your lips. You wanna look good for Osgood, don't ya?
Jerry: It's just gonna break his heart when he finds out I can't marry him.
Joe: So, it's gonna break Sugar's heart when she finds that I'm not a millionaire. That's life. You can't make an omelette without breaking an egg.
Jerry: What are you giving me with the omelette?
Joe: Nag, nag, nag. Look, we've got a yacht, we've got a bracelet. You've got Osgood, I've got Sugar. We'll be really cookin'!

But Daphne spots Spats in his compact's mirror while applying lipstick to his pursed lips: "Something tells me the omelette is about to hit the fan." All the tangled romances are cut short by the gangster's appearance. To save themselves from Spats' revenge, the 'girls' decide they must flee - but first they share an excruciating elevator ride with the flirtatious mobsters:

Gangster 1: ...Ain't I had the pleasure of meeting you two broads before?
Josephine: Oh, no.
Daphne: You must be thinking of two other broads.
Gangster 2: Have you ever been in Chicago?
Daphne: Us? We wouldn't be caught dead in Chicago.

As they hurriedly pack their suitcases for a getaway, Jerry is upset about their expected fate:

I tell you, Joe, they're on to us. And they're gonna line us up against the wall. (He gestures with an imaginary machine gun shooting them down.) And then the cops are gonna find two dead dames and they're gonna take us to the ladies' morgue and when they undress us, I tell you, Joe, I'm gonna die of shame.

He also laments that he is leaving Osgood: "I tell you. I will never find another man who's so good to me." He suggests pawning Osgood's expensive bracelet present to find financial independence: "We're gonna sell this bracelet and we're gonna take the money and we're gonna grab a boat down to South America and hide out in one of the banana republics, because I figure that if we eat nothing but bananas, we could live there for fifty years - make it a hundred years - if we get out of the hotel alive." Atypically not acting like a "heel," Joe guiltily insists that he must call to say goodbye to Sugar before ditching her:

Joe: We can't just walk out on her without saying goodbye.
Jerry: What? Since when? You usually walk out and leave 'em with nothing but a kick in the teeth.
Joe: That's when I was a saxophone player. Now I'm a millionaire.
Jerry: Well, mail her a post-card. Those gorillas may be up here any minute.

Joe fakes a "ship-to-shore" phone call to a love-delirious Sugar. Rapturous, she recalls her dream from the night before - a combination of her real and imagined experience:

I never slept better. I had the most wonderful dream. I was still on the yacht and the anchor broke loose. We drifted for days and days. You were the captain and I was the crew. I kept a look-out for icebergs. I sorted your shells and mixed your cocktails. And I wiped the steam off your glasses. And when I woke up, I wanted to swim right back to you.

Joe gives her an "unexpected" goodbye with his Cary Grant accent. To cancel his future contacts with her, he uses a "high finance" excuse that he is sailing right away, and leaving permanently for the oil fields of Venezuela for a marital "merger" with the daughter of the president of a Venezuelan oil syndicate:

According to our tax advisors, she's only so-so, but that's the way the oil gushes. You know, a man in my position has a certain responsibility to the stockholders, you know, all those little people who have invested their life's savings.

She maintains her emotional composure, and replies that she will take his stock tip seriously: "You've given me all that inside information. First thing tomorrow, I'm gonna call my broker and have him buy me 50,000 shares of Venezuelan oil."

As a "going away present" to Sugar, he kicks Jerry's box of white orchids with his diamond bracelet inside, (given to Jerry by Osgood), across the hotel hallway to Sugar's door while claiming that it should already have been delivered. She is surprised by his display of generosity:

Sugar: They're here. White orchids. I haven't had white orchids since I was a debutante...Real diamonds! They must be worth their weight in gold. Are you always this generous?
Joe: Not always. But I wanted you to know how very grateful I am for what you did for me.
Sugar: I didn't do anything. It just happened.

After tearfully receiving the phone call, Sugar suffers from the blues and comes into Daphne's and Josephine's room looking for bourbon to get drunk: "All of a sudden I'm thirsty." She laments her loss of Junior - but Jerry isn't as appreciative of the gift:

Sugar: He's going to South America to marry another girl. That's what you call high finance.
Jerry: That's what I call a louse! Sugar, if I were you, I would take that bracelet and throw it right back in his face...
Sugar: He's the first nice guy I ever met in my life, the only one that ever gave me anything.

Josephine witnesses how he has broken Sugar's heart - from a new, feminine perspective:

Josephine: You'll forget him, Sugar.
Sugar: How can I? No matter where I go, there will always be a Shell station on every corner.

The mobsters are suspicious when they see the two dames, Jerry and Joe, climbing down from their second floor balcony room with their instruments - and they look mysteriously familiar as "the two musicians from the garage":

Maybe those dames ain't dames! Same faces, same instruments.

Spats vows: "They wouldn't be caught dead in Chicago, so we'll finish the job here." After a wild, slapstick chase through the hotel, the two musicians (after changing costumes and appearing as a bellboy and an old man in a wheelchair) unfortunately find themselves hiding under the gangster's convention banquet table where all the mob members are gathering. They realize that Spats has arrived when his feet are seen from their point of view under the table. The mobster is angered that his goons have lost their trail, and threatens to stuff a grapefruit half into the face of one of his cohorts (Mike Mazurki): "Why you stupid idiot!" [This is a deliberate rendering of a famous scene with James Cagney in the crime film Public Enemy (1931) - but now with a male victim.]

Joe and Jerry hear balding Little Bonaparte (Nehemiah Persoff), the nationwide crime syndicate boss [in a characterization mirroring Edward G. Robinson's Rico in the gangster classic Little Caesar (1930)] - and the rival of Spats from the South Side - open the dinner. Bonaparte criticizes Spats for the "big noise" that he made on the St. Valentine's Day job when rubbing out seven North Side chapter members:

Bonaparte: Now some people say he's gotten a little too big for his spats. But I say, he's a man who'll go far. Some people say he's gone too far. But I say, you can't keep a good man down. Of course he's still got a lot to learn. That big noise he made on St. Valentines Day - that wasn't very good for public relation. You let them two witnesses get away. That sure was careless.
Spats: Don't worry about those two guys. They're as good as dead. I almost caught up with them today.
Bonaparte (flabbergasted): You mean you let 'em get away twice? Some people would say that's real sloppy. But I say, to err is human, to forgive divine.

Bonaparte has arranged a party - to commemorate the occasion of the massacre. A giant "Happy Birthday Spats" cake is wheeled in and during the singing of "For He's a Jolly Good Fellow," Joe and Jerry witness hit man Johnny Paradise, the one who was earlier flipping a coin, leap out with a tommy gun [an example of a reversed sex role - usually a beautiful girl emerges from a cake], eliminating Spats and his gang. [It is the musicians' second witnessing of gangland mass murders.] Police Sergeant Mulligan has trailed Spats, and just after the massacre, he busts in to make a mass arrest of the assembled mob. A few of the hoods escape in their pursuit of Joe and Jerry.

On their flight out of the hotel, Joe and Jerry, who have decided to change back into drag clothes for safety's sake, plan to use Osgood's yacht to escape with Daphne eloping with Fielding:

Gangster: We got our guys watching the railroad station, the roads, and the airport. They can't get away.
Jerry (overhearing): Did you hear that?
Joe: Yeah, but they're not watching yachts. Come on, you're gonna call Osgood.
Jerry: (repeating) I'm gonna call Osgood. What am I gonna tell him?
Joe: You're gonna elope with him.
Jerry: Elope. Elope! But there are laws, conventions.
Joe: There's a convention, all right. There's also the ladies' morgue.

While Jerry phones Osgood, Joe watches a soulful, sad Sugar singing the poignant "I'm Through With Love" on the bandstand in the cabaret.

I'm through with love, I'll never fall again
Said adieu to love, I'll never fall again
For I must have you or no one, and so I'm through with love
I've locked my heart, I'll keep my feelings there
I've stocked my heart, with icy frigid air.
And I mean to care for no one, because I'm through with love.
Why did you lead me to think you could care?
You didn't need me, you had your share
But slaves around you to hound you and swear
With deep emotion, devotion to you.
Goodbye to spring and all it meant to me
It can never bring the thing that used to be
For I must have you or no one
And so I'm through with love
And so I'm through with - baby, I'm through with love.

Joe is ready to reveal the truth about 'Junior' and Josephine to Sugar. Dressed as Josephine, he comes up to her and gives her a goodbye kiss as a female - a moment of sexual exposure. He affirms the bond between them - both as an empathizing female and as a man after a full masculine kiss on the lips. At first believing that he's the millionaire, Sugar opens her eyes, looks up and exclaims: "Josephine!" [Symbolically, she loves both his masculine and feminine personalities (both Junior and Joe - sephine).] When one of the pursuing gangsters shouts out: "That's no dame," everyone suddenly realizes that Josephine is a man. When tears come to Sugar's eyes, he wipes them away and tells her in his 'Joe,' male saxophone player voice: "None of that, Sugar. No guy is worth it."

Josephine flees to the pier with Daphne where Osgood is waiting in a pre-arranged getaway boat. Osgood, who is looking forward to his marriage to Daphne, is impressed by Daphne's excited state: "She's so eager." Retaining her aggressor role, Sugar chases after them on the bicycle - she wants to come along too: "Wait for Sugar!" Osgood thinks it's another "bridesmaid," but Daphne explains she's a "flowergirl."

Seated with Sugar in the back of the boat as it speeds away from the dock, Joe asks why she is coming along after he has been unmasked. Sugar replies: "I told you. I'm not very bright." He literally removes his blonde wig and feminine clothing. The vulnerable Sugar knows of the hoax and his deceitfulness as a fake millionaire, but loves the "no-goodnik" anyway:

Joe: You don't want me, Sugar. I'm a liar and a phony. A saxophone player. One of those no-goodniks you keep running away from.
Sugar: I know, every time.
Joe: Sugar, do yourself a favor. Go back to where the millionaires are, the sweet end of the lollipop, not the cole slaw in the face, the old socks and the squeezed-out tube of toothpaste.
Sugar: That's right. Pour it on. Talk me out of it. (She grabs him to kiss him.)

Joe wins Sugar's affection as a renovated man [as himself with a renewed feminine side] and not as an emotionally/sexually-passive millionaire - and she finds the "sweet end of the lollipop" - with him.

The film's classic closing scene, that contains the greatest fade-out line in film history, regards the other mismatched couple. Rich suitor Fielding overlooks the obvious gender problem - that Daphne is a man. With many explanations for why 'she' can't get married, Daphne attempts to end 'her' relationship with the persistently-amorous Osgood. There are many limitations, Daphne argues, including her physical shape, her hair color, her smoking habit, the fact that 'she' has sinfully "been living with a saxophone player" [literally under the domination of Joe's 'male' character], and the problem of infertility. Finally in exasperation, Daphne gives up trying to break the news gently to him to discourage his unflappable affection. He rips off his wig and declares his manhood, but still fails miserably. [The last line of dialogue was thought up by co-screenwriter I.A.L. Diamond the night before the scene was shot.]

Osgood: I called Mama. She was so happy she cried. She wants you to have her wedding gown. It's white lace.
Daphne: Yeah, Osgood. I can't get married in your mother's dress. Ha ha. That-she and I, we are not built the same way.
Osgood: We can have it altered.
Daphne: Aw no you don't! Osgood, I'm gonna level with you. We can't get married at all.
Osgood: Why not?
Daphne: Well, in the first place, I'm not a natural blonde.
Osgood: Doesn't matter.
Daphne: I smoke. I smoke all the time.
Osgood: I don't care.
Daphne: Well, I have a terrible past. For three years now, I've been living with a saxophone player.
Osgood: I forgive you.
Daphne: I can never have children.
Osgood (unperturbed): We can adopt some.
Jerry-Daphne: But you don't understand, Osgood. (He whips off his wig, exasperated, and changes to a manly voice.) Uh, I'm a man.
Osgood (unruffled, undaunted, and still in love): Well, nobody's perfect.