Gabriel Eisenstein, a respectable man of substance, has been sentenced to serve eight days in prison for assaulting a policeman.  As he packs his bags in preparation, his friend Falke arranges to postpone his arrest until the following morning so that Gabriel can attend Prince Orlofsky's grand party that evening.

Meanwhile an old admirer of Gabriel's wife, Rosalinda, Alfredo, the opera singer, has been eager to take advantage of Gabriel's absence.  He swiftly moves in and makes himself at home in the Eisenstein house, complete with Gabriel's nightcap and dressing gown.  When the prison governor comes to arrest Mr. Eisenstein, he mistakes Alfredo for the man of the house and takes him into custody, leaving Rosalinda unable to right this wrong for fear of compromising herself.

The Eisenstein maid, Adele, has also acquired an invitation to the party where, dressed in her mistress' "borrowed" best gown, she is introduced by her sister as "Olga", an actress. Falke recognises her, but seeing his opportunity for further revenge on his old friend, Gabriel, he goes along with her new identity.  Flake is still smarting from an earlier fancy dress party when Gabriel (dressed as a butterfly) had pushed Falke (dressed as a bat) into a fountain.  Prince Orlofsky's party is Falke's chance to take his "Bat's Revenge" as he stages an elaborate entertainment, which includes new identities for Gabriel, now a French Marquis, the prison governor as the Chevalier Chagrin and Rosalinda, now a masked Hungarian Countess.

The stage is set for an evening of intrigue in which Gabriel's philandering, along with several embarrassing assumed identities, are ultimately exposed and the air is filled with recrimination and eventual reconciliation.