NOTE: This spoiler was sent in by Joanne.
Penelope starts out with Christina Ricci (who plays Penelope Wilhern) narrating the details of her curse. It all started with her blue-blooded great-great-great grandfather who had an affair with a servant girl. When he told his family he was going to marry her, they all laughed at him and he realized that he could not possibly marry her. So instead he married a respectable girl, like all blue-blooded heirs do. As for the servant girl, she fell off a cliff (an apparent suicide). The servant girl's mother, who happens to be the town witch, curses the Wilhern family, so that the next daughter born would have the face of a pig. The curse can only be broken when one of their own (meaning a blue-blood) accepts the girls’s hideousness. Luckily for the family, the next few generations are all sons...until Penelope is born. Unfortunately, her family is extremely prominent and has to live in the spotlight, dealing with paparazzi hiding out in their cabinets trying to take a picture of the new baby (the mother, Jessica, finds him and clobbers him with a whisk, injuring his eye. Very important later). Jessica soon decides to fake baby Penelope's death and have her live in obscurity. At the "funeral", however, she catches a glimpse of the injured papparazo (sporting an eye patch) who is hungry for revenge.
Years later, Penelope explains that her mother hired a matchmaker, Wanda (played by Ronni Ancona), to pair her up with a blue-blooded male to break the curse. Every man who sets their eyes upon her face, however, flees and the butler has to chase them down so that they sign a privacy contract. Cut to the present. Edward (Simon Woods), a potential suitor, is speaking to Penelope through a two-way mirror. He is begging for her to come out. Finally, she does and he, like many others, flees. This time, though, the butler cannot catch him and he runs straight to the Police station. The police believe that he is mad (he describes Penelope as vicious with fangs, which of course is false) and they lock him up for the night. The next day, a newspaper prints a story about Edward's deteriorating mental state and Edward goes to the office and demands a retraction. As security is leading him out, the one-eyed paparazzo, Lemon (played by Peter Dinklage) hears him talking about Penelope and they team up. They want a picture of Penelope. Edward wants to clear his name and Lemon just wants revenge. However they need a blue-blood in order to carry this plan out and many blue-bloods don't need money or bribery. However, Lemon hears about Max Campion, a blue-blood who lost all of his money due to gambling problems.
Cut to a dirty looking pub-like place. There are guys playing cards at a table, including a fat guy (important!), an old lady, and the James McAvoy character. McAvoy loses all of his money and is a sore loser about it, so the fat guy has to pick up all of the chips off of the ground. When Lemon asks for Max, the bartender points toward McAvoy. Max soon becomes part of the ploy, for a cool payment of $5000. The next day, Max joins a bunch of other suitors in the library, with a camera hidden in his jacket. When he raises his hand, the camera snaps a picture, and he seems to be having trouble with it. He falls to the ground, trying to conceal it, and misses Penelope coming into the room. All of the other suitors run out and Penelope leaves. When Penelope sees him sitting on the couch (there is a hidden camera in the library), she uses her two-way mirror to talk to him. He doesn't get the picture, but he does get an invitation to come back the next day.
The next day, Max tries to steal a first-edition book, not knowing that Penelope is watching. She catches him, but does not care much. She talks to him about her dream of becoming a horticulturist. He comes back the next day and plays with a ceramic frog. He laughs and plays it like a flute. She asks him if he plays any instruments. He tells her to guess. The next day, she has a bunch of different instruments and asks him to play each of them. He does, horribly, singing off-key to "You are my sunshine." She laughs and the next day she bets her life that he plays piano. He tells her not to bet anything with a gambler. He goes to the piano in the corner of the room and attempts to play the song. He's having trouble with it and Penelope finally gets out of the room to help him. But when he sees her face, he is shocked, but he doesn't run away. He reaches to touch her nose, but the camera goes off and Penelope runs. Max flees the house and meets up with Lemon and smashes the camera, telling him he wants out of the plan. Jessica sees Max with Lemon and tells Penelope that he was a paparazzo. Max comes back to apologize and Penelope asks him to marry her, but he says no.
Penelope decides to run away, concealing her nose with a scarf, and she takes her mother's credit card with her. Penelope checks into a hotel and enjoys finally being able to go outside. She ends up at a bar, Cloverdlilly (which Max tells her about) and drinks her first beer. There, she meets Anne (Reese Witherspoon) and they become friends. Anne takes her around town and Penelope buys postcards to send back to her distressed parents, who can't exactly get anyone to help find her, seeing that no one has ever seen her. Max quits gambling and meets up with an old friend to help him get his life in order. It is revealed that he actually does play piano. Lemon and Edward print an ad in the newspaper, offering $5000 dollars to anyone who will take a picture of Penelope. Penelope sees this article and in anger, decides to turn herself in. She takes pictures at a photo booth and gives them to Lemon herself. Lemon prints the picture, although he feels guilty, and to Edward's dismay, Penelope becomes a public sweetheart. Max tries to communicate with her, but she rejects him, still hurt.
Edward, on the other hand, has said some very unsavory things about Penelope, and his father tells him (quite forcefully) to fix the situation. Edward decides to propose to Penelope and she, not knowing of his deceit, accepts. Lemon and Max express outrage at this engagement, and Edward is not too happy himself, but Jessica is thrilled. Lemon hears that Max is in prison and goes to visit him to try to talk about Penelope. However, to his surprise, Max Campion turns out to be the fat guy at the bar. The 'Max' that Lemon hired was not a blue-blood at all. 'Max' realizes this and he knows that he will not be able to break the curse, so he does not try to stop the wedding.
When the wedding finally rolls around, Anne is talking to the bartender of the Clovardlilly about the marriage, expressing her surprise at Penelope's fiancé. But at the alter, Penelope runs away, locking herself in her room, while her mother chases her down. When her mother asks why she won't take this opportunity to break the curse, Penelope exclaims, "Because I'm happy just the way I am!" This, as it turns out, breaks the curse, because "one of their kind" doesn't necessarily mean a blue-blood husband. Penelope decides to fade into obscurity, out of the public eye, to become a horticulturist/teacher. When Halloween comes around, all of her female students dress up as Penelope, complete with pig masks.
Anne and Penelope show up at a costume party. Penelope is clearly nervous about something and Anne leads her to an apartment door. Penelope puts on a pig mask and Anne knocks. 'Max' answers the door and Anne explains that her friend has to use the bathroom. Max allows her to go to the bathroom as Anne makes an excuse about getting more punch. They talk and Max reveals that he is still in love with Penelope, not realizing that he's actually talking to Penelope. But soon after, he suspects that it is her and his suspicions are confirmed when she sees the piano in the corner of his room. She takes off the mask and they kiss.
A few months later, she is telling her story to her students. One of her students gets the moral, that it's not the power of the curse - it's the power you give the curse. The kids run off and 'Max' pushes Penelope on a swing. Lemon is on a boat nearby and is about to take a picture of the happy couple, but at the last moment, decides against it and rows away.