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Curtis convinces Jimmy and Marty that they should venture beyond traditional rhythm and blues and soul audiences and aim for the pop market. "Cadillac Car" makes its way up the pop charts, but a cover version by white pop singers Dave and the Sweethearts ("Cadillac Car" (Reprise)) steals the original recording's thunder. C., and Jimmy's producer, Wayne, resort to payola, bribing disc jockeys across the nation to play Jimmy Early and the Dreamettes' next single, "Steppin' to the Bad Side". Conflict arises between Marty and Curtis when Curtis moves in on Marty's turf: Jimmy Early.Things become more complicated when Effie begins dating Curtis, and Jimmy, a married man, begins an affair with Lorrell ("Party, Party").
For the contest, the Dreamettes sing "Move (You're Steppin' on My Heart)", a song written by Effie's brother, C. Unfortunately, they lose the talent show, but backstage, the girls and C. meet Curtis Taylor, Jr., a car salesman who becomes the Dreamettes' manager.
The Dreams make their club debut in the Crystal Room in Cleveland, Ohio, singing their first single ("Dreamgirls").
After a triumphant show, the press is eager to meet the newly minted stars ("Press Conference").
Deena is not the only one chafing under Curtis's control: C. is enraged by Curtis's constant rearrangements of his songs, including an emotional ballad, entitled "One Night Only", which Curtis wants instead recorded to reflect the "new sound" he is inventing.
Deena Jones and the Dreams and Jimmy Early perform at a National Democratic fundraiser, on a bill featuring such groups as The Five Tuxedos ("Got to Be Good Times").