The film is set in a small town during the depression of the 1930s. Farrow plays a klutzy waitress and abused spouse whose only escape from dreadful reality is the local movie theatre. While watching a particular film for the fifth time, one of the characters (Daniels) steps out into the theatre from the movie screen to romance her.

This is the first of many surprising, original, and humorous plot twists, all of which work very well. Daniels-the-character is a naive, good-natured person with little knowledge of the real world, and the resulting misunderstandings (he can't spend his play money, he is clueless about prostitutes) are very funny.

Soon, Daniels-the-actor comes to town from Hollywood to confront Daniels-the-character, while Farrow must choose between the two Daniels and her good-for-nothing husband (Danny Aiello). Allen remains behind the camera.

Allen, while making us laugh, has a couple points he is getting across. He lampoons Hollywood hypocrisy, which is present in the 1930s as in any era. The various actors come across as petty, manipulative and self-involved. The film also has a negative depiction of men. Of all the major and minor male characters, only Daniels-the-character, who isn't real, is a swell guy. Other characters, including the husband, Daniels-the-actor, and the restaurant owner, do not come off well.

"The Purple Rose of Cairo" won the Golden Globe award for Best Screenplay (by Allen), and was given an Oscar nomination in that category.