This film explores a common fantasy theme; the idea that fictional characters can take on a life of their own and interact with the real world. (Pirandello's play "Six Characters in Search of an Author" is a good literary example). It is set in New Jersey at the height of the Great Depression of the 1930s. The main character, Cecilia, is a young woman trapped in an unhappy life. Her husband, Monk (a name presumably chosen as an ironic joke), is violent, abusive and unfaithful; he is unemployed, but still manages to find enough money to drink and gamble. At the diner where she works as a waitress she is bullied by her unpleasant boss.

Cecilia's main distraction from her troubles is the cinema,either going to watch films or obsessively discussing the private lives of the stars with her friend. She has been several times to see the film currently playing at her local cinema, a romantic comedy called "The Purple Rose of Cairo". Despite its title it has little to do with Egypt but is mostly set among the wealthy members of New York's high society. During one of the performances of this film Tom Baxter, one of the characters in the film, steps down from the screen and addresses Cecilia, saying that he has seen her come to watch him several times and declaring that he has fallen in love with her. The film then chronicles the romance between the fictional Tom and the real Cecilia and the complications which ensue. The film production company are unhappy that a character from one of their film has escaped, and send Gil Shepherd, the actor who originally played Tom, to New Jersey to try and persuade his creation to return to the screen. Cecilia finds herself falling in love with both Tom and Gil.

When Tom comes down from the screen, he discovers that the real world is very different from the one that he inhabits, and much of the humour in the film arises from his discovery of this strange new world. He is only aware of those matters which exist in his fictional world or which have been written into his character, so he has no idea that poverty or unemployment exist until Cecilia enlightens him. Through a misunderstanding he finds himself in a brothel, but totally fails to realise the nature of the establishment, because sex was never mentioned in the light comedies of the era. ("The Purple Rose of Cairo" seems to have been an influence on a more recent comedy, "Pleasantville", which also featured the interaction between the real world and a fictional one with curiously naïve inhabitants).

This plot might seem like mere fantasy, but behind it lies a point of genuine philosophical, even theological, interest; is it better to live in an imperfect world and to have free will or to live in a perfect one and to lack it? Cecilia envies the characters she sees on the screen because they are rich, beautiful and seemingly happy. Tom, on the other hand, envies the inhabitants of the real world because they are free to make their own choices and do not have to go on repeating the same scenario ad infinitum. Cecilia is devoutly religious, but Tom has no knowledge of God, because religion does not feature in the plot of his film; when Cecilia explains the concept to him, Tom conceives of God as having the same relation to the real world as the scriptwriter does to his fictional one. (Perhaps the implication is that even in the real world people are not free, but merely acting out a script written by God or fate).

Although the film has a downbeat ending, when Cecilia has to confront the difference between her world and Tom's (where there is always a happy ending), the general tone is light and amusing, a tone set by the acting, especially that of Jeff Daniels in the dual role of Tom and Gil, who have quite different characters. Tom is naïve and innocent, but also gentlemanly, generous and sincere; Gil is more cynical, worldly-wise and self-centred. Daniels is able to convey the contrasting aspects of their characters, while giving the "real" Gil a greater sense of solidity than the "unreal" Tom. Although their association may have ended unhappily, Mia Farrow did much of her best work with Woody Allen, and her Cecilia is an endearing heroine. Danny Aiello is convincingly thuggish as Monk. The film as a whole is partly light-hearted fantasy, part touching love-story and part philosophical speculation; one of Allen's best films.