A lone figure, Jacquot, appears on an empty stage and begins playing a concertina ("Opening: Love Makes The World Go Round"). Gradually, several roustabouts enter and begin setting up a traveling carnival, complete with colorful banners and bright costumes ("Direct From Vienna"). Lili, a wide-eyed orphan, enters, seeking a job with the carnival ("A Very Nice Man"). Narrowly escaping the sexual advances of Gobert, the souvenir salesman, Lili instead grows enchanted by Marco the Magnificent, the show’s handsome and confident magician.
Meanwhile, Paul Berthalet, a lonely and bitter puppeteer, prepares a lifeless and uninspired act. A former dancer, he suffered a leg injury in the war and had to forsake his dancing career. Schlegel, the carnival manager, hates the act and promptly fires him. Paul’s assistant, Jacquot, hopes to smooth things over, but Paul realizes something must change ("I've Got to Find a Reason").
Lili, initially dismissed by Paul, tells Paul and Jacquot that she’s come a long way from the tiny town of "Mira" and longs to live a grand life. When Marco returns from the parade, he invites Lili to his trailer ("A Sword And A Rose And A Cape"). Rosalie, Marco’s longtime mistress and assistant, wonders whether Marco is having an affair behind her back ("Humming").
Marco offers Lili a job in his magic show and she excitedly accepts ("Yes, My Heart"). Meanwhile, Jacquot convinces Paul to stay with the carnival. Paul weighs his bitter melancholy against the joy of the smiling puppets ("Everyone Likes You"). At the magic show, unable to keep her enthusiasm under control, Lili ruins one of Marco's magic tricks and Schlegel fires her ("Magic, Magic"). Despite the mishap, the rest of the carnival goes on without a hitch ("Tanz Mit Mir"/"Carnival Ballet").
Humiliated, Lili attempts a suicidal jump from the acrobat's ladder, but she is stopped by a small redheaded puppet named Carrot Top. Lili soon meets the three other puppets: Horrible Henry, Marguerite, and Reynardo the Fox. Lili comforts Horrible Henry ("Love Makes the World Go 'Round") and joins the puppet act. Though she pities the puppets, Lili still harbors romantic feelings for Marco. As she sets off with Jacquot to arrange her lodgings, Paul emerges from behind the puppet booth, and Marco taunts him: “Poor old Carrot Top… she loves me.”
The puppet act becomes a hit with Lili, who does not realize who they really are ("Yum Ticky"/"The Rich"/"Love Makes the World Go 'Round”/"Beautiful Candy"). Paul curses his obsession with Lili ("Her Face"), denying any feelings of love. As Paul, he treats her with increasing cruelty, but he is compassionate and charming through his four alter egos. The carnival grows in popularity, and Jacquot predicts it’ll soon be "The Grand Impérial Cirque De Paris."
In the morning, Paul stops Marco and Lili just before they kiss. In rehearsal with Lili, Paul expresses his jealousy through verbal abuse. Correcting Lili’s every move, Paul stumbles and falls. Lili breaks down and suddenly, Paul kisses her. Lili, shocked, angry, and confused about Paul's feelings, decides to leave the carnival. Separately, Paul and Lili grapple with their conflicted emotions ("I Hate Him"/"Her Face" Reprise).
The next day, the circus travels to a new town ("The Grand Impérial Cirque De Paris"/"Direct from Vienna" Reprises). Rosalie threatens to leave Marco, but they pledge their love to each other and decide to run away and start their own show ("Always, Always You"). Secretly, Marco tells Lili he is leaving the circus and asks her to join him. Despite her knowledge of Marco’s womanizing ways, Lili frantically accepts. When Paul objects, Marco insults him, and the two men fight. Lili screams out her hatred for Paul and he strikes her. Lili runs off, and Paul finally confesses "She's My Love." Jacquot, infuriated, tells Paul that he made Lili grow up, teaching her the world is full of cruelty and not of love.
Lili says goodbye to Marco, realizing she’d been living a little girl's dream and she must move forward with her life. Marco, impressed with Lili's newfound maturity, lets her go. Carrot Top and Horrible Henry appear and ask Lili to take them with her. She sees the puppets are trembling, and lifts the puppets off to discover they have been Paul all along. Paul bitterly confesses his love for her, throwing the puppets to the ground. Lili, beginning to understand the shame and kindness in Paul, gently retrieves the puppets. Lili and Paul embrace, and together, they set off to follow the carnival.