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It is the late sixteenth century. Failed author-soldier-actor and tax collector Miguel de Cervantes has been thrown into a dungeon by the Spanish Inquisition, along with his manservant. They have been charged with foreclosing on a monastery. The prisoners instantly set up a mock trial right there. Cervantes agrees to do so, except for a precious manuscript which the prisoners are all too eager to burn. He asks to be allowed to offer a defense, and the defense will be a play, acted out by him and all the prisoners. In a few short moments, Cervantes has transformed himself into Alonso Quijana, an old gentleman who has read so many books of chivalry and thought so much about injustice that he has lost his mind and now believes that he should go forth as a knight-errant. Quijana renames himself Don Quixote de La Mancha, and sets out to find adventures with his 'squire', Sancho Panza. Don Quixote warns Sancho that the pair are always in danger of being attacked by Quixote's mortal enemy, an evil magician known as the Enchanter. The two proceed to the inn. When Quixote catches sight of Aldonza, he believes her to be the lady Dulcinea, to whom he has sworn eternal loyalty. Aldonza is annoyed at Quixote's strange and kind treatment of her. The priest and Dr. Carrasco arrive, but cannot reason with Don Quixote, who suddenly spots a barber wearing his shaving basin on his head to ward off the sun's heat. Quixote immediately snatches the basin from the barber at sword's point, believing it to be the miraculous Golden Helmet of Mambrino, which will make him invulnerable. Pedro enters, furious at being kept waiting, and slaps Aldonza. Enraged, Don Quixote takes him and all the other muleteers on in a huge fight. Don Quixote has no martial skill, but by luck and determination - and with the help of Aldonza and Sancho - he prevails, and the muleteers are all knocked unconscious.
The noise has awakened the Innkeeper, who enters and kindly tells Quixote that he must leave. Quixote apologizes for the trouble, but reminds the Innkeeper of his promise to dub him knight. The Innkeeper does so . Quixote then announces he must try to help the muleteers. Aldonza, whom Quixote still calls Dulcinea, is shocked, but after the knight explains that the laws of chivalry demand that he succor a fallen enemy, Aldonza agrees to help them. Don Quixote and Sancho have left the inn and encounter a band of Gypsies who take advantage of Quixote's naivete and proceed to steal everything they own, including Quixote's horse Rocinante and Sancho's donkey Dapple. The two are forced to return to the inn, where the Innkeeper tries to keep them out, but finally cannot resist letting them back in out of pity. Suddenly, another knight enters. He announces himself as Don Quixote's mortal enemy, the Enchanter, this time appearing as the 'Knight of the Mirrors'. He insults Aldonza, and is promptly challenged to combat by Don Quixote. The Knight of the Mirrors and his attendants bear huge shields with mirrors on them, and as they swing them at Quixote ,the glare from the sunlight blinds him. The attacking Knight taunts him, forcing him to see himself as the world sees him - a fool and a madman. Don Quixote collapses, weeping. The Knight of the Mirrors removes his own helmet - he is really Dr. Carrasco. We are now in Alonso Quijana's bedroom, where he has fallen into a coma. Antonia, Sancho, the Housekeeper, the priest, and Carrasco are all there. He realizes that he is now dying, and asks the priest to help him make out his will. As Quijana begins to dictate, Aldonza forces her way in. When he does not recognize her, she sings a reprise of Dulcinea to him. Suddenly, he remembers everything and rises from his bed, calling for his armor and sword so that he may set out again. But it is too late - in mid-song, he suddenly groans and falls dead. When Sancho calls her by name, she asks him to call her Dulcinea. The Inquisition enters to take Cervantes to his trial, and the prisoners who are deeply effected by his story, finding him not guilty, return his manuscript. As Cervantes and his servant mount the drawbridge-like staircase to go to their impending trial yet gleaming with courage, the prisoners sing 'The Impossible Dream´ in chorus.
