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In Barcelona, there is an air of celebration. Kitri, the daughter of an innkeeper, and Basilio, a barber, are in love with each other. Lorenzo, Kitri’s father, finds them together and chases Basilio away: he is poor and unfit as a suitor for his daughter. In fact, he wants Kitri to marry Gamache, who, though insipid, is rich and of noble birth. Kitri adamantly refuses to bow to her father’s will.
Don Quixote and his squire Sancho Panza arrive in the square just as the fiesta is underway. Making out the innkeeper, Don Quixote mistakes him for the owner of the castle and addresses him with respect. Lorenzo responds with the same deference, and invites the knight to his inn. Sancho Panza remains in the square to flirt with the girls and stuff himself on food. When some youths begin to make fun of him, Don Quixote immediately draws his sword and runs to his squire’s help.
Catching sight of Kitri, he sees in her the beautiful Dulcinea, the lady of his dreams, the “Lady of his heart”. But Kitri disappears, running off with Basilio. Lorenzo, Gamache and Don Quixote set off on the fugitives’ tracks.

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Scene 1
Kitri and Basilio are hiding in a tavern, where dancing is in full swing; they are found by their pursuers, the innkeeper-father Lorenzo, the suitor Gamache and Don Quixote. Lorenzo wants immediately to announce the engagement of Kitri and Gamache, but Basilio, in accord with Kitri, pretends to kill himself in desperation. She cries on the body of her beloved. Don Quixote, prompted by noble indignation, accuses Lorenzo of cruelty, and threatening him with his sword, forces him to agree to the marriage of his beautiful daughter to the handsome barber. Basilio quickly stands up; there is no more need to pretend to be dead.

Scene 2
Continuing their journey, Don Quixote and Sancho Panza arrive in a clearing near some windmills, where there is a camp of gypsies who have a puppet theatre. The owner of the theatre invites Don Quixote to attend a performance. The knight watches with great attention, and forgetting that it is only a play, he rushes on stage with his sword drawn to defend all those in need of his help. He destroys the theatre and sends the puppets flying. Catching sight of the windmills, he mistakes them for wicked giants to fight. The wind-vanes sweep him up in the air, only to hurl him disastrously to the ground.

Scene 3
Don Quixote, who is injured, and Sancho Panza find themselves in a forest. To Don Quixote, it seems to be full of monsters. Sancho Panza helps his master to get settled for the night, and goes to look for help. Falling asleep, Don Quixote sees in his dreams Dolcinea, “the Lady of his heart”, surrounded by Dryads and fairies. Sancho Panza returns with the duke and duchess, who were hunting in the forest. The squire begs them to help the dreamy Don Quixote. They invite the knight errant to their castle.

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In the duke’s castle, everything is ready for the arrival of Don Quixote. After having heard from Sancho Panza of the happy conclusion to the love story between Kitri and Basilio, the duke and duchess agree to the celebration of their marriage in the castle. Don Quixote and Sancho Panza are invited to sit in the place of honour. A solemn procession files past. Seeing Kitri, Don Quixote again mistakes her for the “Lady of his dreams”. But the duke and duchess manage to convince him that Kitri is really the daughter of the innkeeper, whom he protected and helped in marrying her beloved Basilio. The celebrations continue, and everyone thanks the brave knight and his faithful squire.