A Broadway producer finds fame with his new act -- a dancing caterpillar.

After staging three flops in a row, Broadway producer Jerry Flynn is in danger of losing his theater because he is unable to pay the $100,000 note that he owes the bank. After his banker, McKenzie, grants him only one week to pay the note, Jerry wanders out into the street, where nine-year old Arthur "Pinky" Thompson and his friend Fatso are playing the harmonica. When Jerry pitches his last nickle over his shoulder for good luck, the boys pocket the coin and offer the producer a peek at Curly, Pinky's dancing caterpillar. Peering into Curly's shoe box, Jerry is amazed to see the caterpillar stand up and begin to wiggle as Pinky plays "Yes Sir, That's My Baby" on the harmonica. Certain that he can build Curly into a celebrity, Jerry offers to buy the insect, but Pinky refuses, claiming that Curly is his friend. Jerry then proposes forming a partnership with Pinky to promote Curly, and the boy accepts. Soon after, Jeanne Thompson, Pinky's sister and guardian, comes looking for her brother. When Jerry gushes his admiration for Curly, Jeanne declares that he is insane and ushers her brother home. Undaunted, Jerry tells Fatso to bring Pinky to his hotel suite the next morning, and there he introduces The Moke, his right-hand man, to Curly. Although Moke is unimpressed with the "dancing worm," Jerry boasts that he will build the caterpillar into a $100,000 investment and directs Moke to bring all the local columnists to his hotel suite. The reporters greet Jerry's tale of "how he found fantasy on the sidewalk" with derision and refuse to peer into Curly's shoe box to see the dancing caterpillar. In the hotel lobby, reporter Brant, Jerry's antagonist, phones his editor to mock Jerry's story. Brant's call is overheard by radio announcer Gabriel Heatter, who is intrigued by Curly's talents and invites Curly, Pinky and Jerry to his office. On his broadcast that night, Heatter relates the story of Pinky and Curly, turning it into a parable about hope. The tale of the boy and the bug inspires the audience, making Curly and Pinky instant celebrities. Among those flocking to see the celebrated insect is Dunhill, a representative from Walt Disney, who offers to buy Curly. Jerry, who has promised Pinky that he would never sell the caterpillar, sets Curly's price at $100,000, the amount that he owes the bank. After Dunhill leaves to present Jerry's offer to Disney, Jeanne arrives, upset about her brother's instant fame, and insists that Pinky immediately return home. As news of the dancing caterpillar sweeps the nation, Jerry and Pinky scheme to win Jeanne's sympathy. Sobbing that he doesn't want to live unless he can continue his partnership with Jerry, Pinky climbs onto a window ledge and threatens to jump. Blaming herself for Pinky's misery, Jeanne relents and allows him to move in with Jerry. Jerry's next challenge comes when a team of lepidopterists dispute Curly's dancing ability. After submitting the caterpillar to the scientists for examination, Jerry instructs Pinky to play "Yes Sir, That's My Baby" on his harmonica. When Curly stands up and begins to sway with the music, the scientists authenticate the insect's musical abilities and demand that he remain in their possession. In response, Jerry accuses the scientists of denying him his bill of rights, thus sparking a nationwide debate over who owns the rights to Curly. Later, as Jerry laments Curly's lack of profitability, Disney calls and agrees to his price. That night, Jerry orders Moke to steal Curly as Pinky sleeps, and although he disapproves, Moke anesthesizes himself with drink and slips into Pinky's room. Pinky awakens just as Moke is about to snatch Curly's shoe box, and after Moke passes out on the bed, Pinky takes Curly and runs away. Jerry, meanwhile, has taken Jeanne out to dinner, and when he brings her home, he finds Pinky waiting for him. After denouncing Jerry for trying to steal Curly, Pinky hides the caterpillar. When Jerry slaps Pinky in anger, the boy hands Curly's box to him. Realizing that he has betrayed the boy, Jerry returns the shoe box, but when Pinky opens it, Curly is gone. As the city searches for the missing caterpillar, Pinky blames Jerry for Curly's loss and refuses to speak to him. Jerry is so distraught that even McKenzie's offer to let him keep the theater fails to cheer him. To patch up their friendship, Moke visits one of Curly's fan clubs and asks the boys to help reconcile Jerry and Pinky. After the boys surround Jerry and escort him to Pinky's apartment, Jerry sits at the piano and begins to play "Yes Sir, That's My Baby." When a butterfly takes flight from inside the piano, Jerry realizes that it must be Curly. Just then, Pinky enters the apartment, and when Jerry tells him the news, he joyfully welcomes Curly home. After fluttering around the room, Curly flies out an open window, and Jerry and Pinky, recognizing that the butterfly must now be free, bid their friend farewell.