Set in New Jersey during the Great Depression in 1935, the film tells the story of Cecilia (Mia Farrow), a clumsy waitress who goes to the movies to escape her bleak life and loveless, abusive marriage to Monk (Danny Aiello), whom she has attempted to leave on numerous occasions.
The latest film Cecilia sees is a fictitious RKO Radio Pictures film, The Purple Rose of Cairo. It is the story of a rich Manhattan playwright named Henry (Edward Herrmann) who goes on an exotic vacation to Egypt with companions Jason (John Wood) and Rita (Deborah Rush). While in Egypt, the three meet archaeologist Tom Baxter (Jeff Daniels). Tom is brought back for a “madcap Manhattan weekend” where he falls head-over-heels for Kitty Haynes (Karen Akers), a chanteuse at the Copacabana.
After Cecilia sits through the film several times, Tom, noticing her, breaks the fourth wall, and emerges from the inner film’s black-and-white world into the full color real world the other side of the cinema screen. He tells Cecilia that he is attracted to her after noticing her watching him so many times, and she takes him around her New Jersey town. Later, he takes her into the film and they have a great evening on the town within the film. The two fall in love. But the character’s defection from the film has caused some problems. In other copies of the film, others have tried to exit the screen. The producer of the film learns that Tom has left the film, and he flies cross-country to New Jersey with actor Gil Shepherd (Jeff Daniels) (the “real life” actor playing the part of Tom in the movie). This sets up an unusual love triangle involving Tom, Gil, and Cecilia. Cecilia must choose between them and she decides to choose the real person of Gil rather than the fantasy figure of Tom. She gives up the chance to return with Tom to his world, choosing to stay with Gil and have a ‘real’ life. Then she finally leaves her husband.
But Gil’s professions of love for Cecilia were false—he wooed her only to get Tom to return to the movie and thereby save his own Hollywood career. Gil abandons Cecilia and is seen quietly racked with guilt on his flight back to Hollywood. Having been left without a lover, job, or home, Cecilia ends up immersing herself in the frothy escapism of Hollywood once again. The final scene shows Cecilla sitting by herself in a theater watching Fred Astaire and Ginger Rogers dancing to “Cheek-to-Cheek” in the film Top Hat, forgetting her dire situation and losing herself in the film.