Between the late 50s and the early 60s,a 20-year-old girl nicknamed "Babydoll" (Emily Browning), is institutionalized by her stepfather (Gerard Plunkett) at the Lennox House for the Mentally Insane after she is blamed for the death of her younger sister. The stepfather bribes Blue Jones (Oscar Isaac), one of the asylum's orderlies, into forging the signature of the asylum's psychiatrist, Dr. Vera Gorski (Carla Gugino), to have Babydoll lobotomized so she cannot inform the authorities of the true circumstances leading to her sister's death. During her admission to the institution, Babydoll takes note of four items that would be integral if she were to attempt an escape.
In the seconds prior to being lobotomized, Babydoll retreats into a fantasy world in which she is newly arrived in a brothel owned by Blue, whom she envisions as a mobster. She befriends four other dancers – Amber (Jamie Chung), Blondie (Vanessa Hudgens), Rocket (Jena Malone), and Rocket's sister, Sweet Pea (Abbie Cornish). Dr. Gorski is envisioned as the girls' dance instructor. Blue informs Babydoll that her virginity will be sold to a client known as "The High Roller" (Jon Hamm). The "High Roller" is actually the doctor scheduled to perform the lobotomy. After Babydoll saves Rocket from a rape attack from the Cook, Gorski encourages Babydoll to perform an erotic dance, during which Babydoll fantasizes she's in feudal Japan, meeting the Wise Man (Scott Glenn). After she expresses her desire to "escape", the Wise Man presents Babydoll with weapons and tells her that she would need to collect five items in order to escape: a map, fire, a knife, a key, and a fifth, unrevealed item that would require "a deep sacrifice". She is confronted by three samurai giants, which she defeats. As her fantasy ends, she finds herself back in the brothel, her dance impressing Blue and other onlookers.
Babydoll convinces her friends to prepare an escape. She plots to use her dances as a distraction while the other girls obtain the necessary tools. During each of her dances, she imagines adventures that mirror the ongoing escape efforts. These adventures include infiltrating a bunker protected by steampunk World War I German soldiers to gain the map (mirrored by Sweet Pea entering Blue's office and copying a map of the brothel/institution); storming an Orc-infested castle to cut two fire-producing crystals from the throat of a baby dragon (mirrored by Amber stealing a lighter from the breast-pocket of the mayor); and boarding a train and combating mechanized guards to disarm a bomb (mirrored by stealing a kitchen knife from the belt of the cook). During the last of these fantasies, Rocket sacrifices herself to save Sweet Pea and is killed when the bomb detonates, which is paralleled in a fight with the cook where he fatally stabs Rocket while she's trying to protect her sister.
Blue overhears Blondie relaying Babydoll's plan to Madam Gorski. After discovering the gruesome scene around the cook in the kitchen, he has the grieving Sweet Pea locked in a utility closet and confronts the remainder of the girls backstage, proceeding to "make examples" by shooting Amber and Blondie. He then attempts to rape Babydoll, but she stabs him with the kitchen knife and steals his master key. Babydoll frees Sweet Pea and the two start a fire, so the institution's checkpoint doors unlock. The two escape into the courtyard, where they find their way out blocked by a throng of men. Babydoll deduces that the fifth item needed for the escape is in fact herself. Despite Sweet Pea's protest, she insists on sacrificing herself by distracting the visitors, thus allowing her friend to slip away.
The scene cuts back to the asylum in which the surgeon has just performed Babydoll's lobotomy. The surgeon is confused by Babydoll's expression and starts to question Dr. Gorski as to why she authorized the procedure. It is also revealed that the events in her dream world also happened in the hospital, and it wasn't just a final fantasy (stabbing an orderly, starting a fire, and helping another girl escape). Gorski realizes that Blue has forged her signature and summons the police, who apprehend Blue as he attempts to sexually assault a lobotomized Babydoll. While being led away, Blue shouts that it's the stepfather they want. The final scene is where Babydoll imagines the bus station, where Sweet Pea is stopped by police as she tries to get on a bus to Fort Wayne. She is rescued by the bus driver (the Wise Man), who misleads the police and allows her to board the bus.
During the end credits, Dr. Gorski and Blue perform "Love is the Drug" in a musical/fantasy sequence while the girls except Babydoll are shown dancing in the background.
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