To select a disguise, select the disguise kit and select the character class you wish to disguise yourself as, you can switch teams by pressing "Y" on Xbox 360 or "Triangle" on PS3. After selecting a disguise the Spy will be involved by a slightly team-colored smoke and particles for about 2 seconds. Once the effect starts, it will not stop for any reason, including becoming cloaked or dying. The effect can be avoided by disguising while cloaked.
Once disguised, the Spy will look like a teammate to members of the opposite team, granted he disguised himself as one, he will done the name (Gamertag/PSN ID) of a player that uses the current class he is disguised as, in case there are no players using that class, he will take the identity of the host, granted he or she is in the other team, if not, a random player will be selected. In case there are more than one players using one class, the Spy will also take the identity of the host if he is using that class and in case he is not, one of the players using that class will be selected. The health bar will always display health at around 75%, thus making enemy spies easy to identify.
If he disguises himself as a class of his own team, he will appear as that class to members of the opposite team. When disguised, he will still look like a Spy to member of his own team, but he will be wearing a mask with a picture of the class he is disguised as and his description box will say: "Disguised as [RED/BLU] [class]"
When disguised, the Spy will adopt the speed properties of classes with lower speed (Sniper, Engineer and Pyro have the same speed as he) He will not, however, adopt their hitboxes, e.g., when a Sniper is trying to headshot a Spy disguised as Engineer, he would have to shoot above his head (from his point of view) to hit the Spy's head hitbox.