I shall never be fool enough to turn knight-errant. For I see quite well that it’s not the fashion now to do as they did in the olden days when they say those famous knights roamed the world.
Don Quixote and Sancho, accompanied by the priest, the barber, Cardenio, and Dorothea appear at an inn, the same one where Sancho was tossed around in a blanket. The barber removes his disguise. The innkeeper and his wife, as well as their daughter and Maritornes, approach the barber, the priest, Cardenio, and Dorothea to discuss Don Quixote’s madness and the chivalric literature that has caused it. The barber and the priest are eager to burn the collection of such literature at the inn. However, the innkeeper defends the books. He argues that the books would have never been published if they were untrue, because the government would have prevented it. He adds, though, that he would never want to become a knight-errant, as he knows that chivalry is out of fashion. He informs the company that a man whose name he does not know left an old trunk with many books and manuscripts at the inn. Even though he is deeply skeptical of books of chivalry, the priest asks the innkeeper if he may copy one of the manuscripts. The priest reads the manuscript to the group.
The manuscript that the priest reads from conveys the story of Lothario and Anselmo, two close friends who reside in Florence, Italy. Ansemlo marries a beautiful woman called Camilla. She is said to have the purest of intentions. One day, Anselmo informs Lothario that he wants to put Camilla’s purity and chastity to the test. He asks Lothario to deliberately woo Camilla to determine whether she will have the ability to resist. Lothario makes a long speech with many classical references and sonnets, putting forward the opinion that Anselmo’s plan is ridiculous. Anselmo, however, doesn’t listen. Lothario lies to Anselmo on a number of occasions, telling him that he attempted to woo Camilla and failed. Anselmo spies on them and finds out that Lothario has been dishonest, and that he hasn’t made any false advances towards the young woman. Anselmo pushes Lothario to promise that he will attempt wooing Camilla while Anselemo is away on a business trip, which will be a week in length. Lothario complies and makes the attempt, and he falls in love with Camilla by accident. Camilla writes to Anselmo, asking him to come home right away and save her from his dishonest friend, Lothario.
Anselmo gets Camilla’s letter and he realizes that his plan is working. He refuses to come home early. Once a bit of time has passed, Camilla gives in to Lothario’s advances and they start a love affair. Upon Anselmo’s return, Lothario tells him that Camilla has resisted his wooing. Ansemlo asks Lothario to write love poetry for the young woman. Now lovestruck, Lothario is happy to do that. Leonela, Camilla’s maid, assists Lothario and Camilla in carrying on their affair, taking a lover of her own. While worried that Leonela will cause her shame, Camilla doesn’t interfere because she worries Leonela will reveal the truth of her affair with Lothario to Anselmo.
Lothario witnesses Leonela’s lover leaving the house one morning. He thinks that Camilla has taken another lover. Jealous and in a fit of rage, he informs Anselmo that he did in fact seduce Camilla but that she hasn’t yet acted on her feelings for him. Lothario tells Anselmo about Camilla’s plan to meet with him in a closet on a specific day, and he urges Anselmo to be there to witness his wife’s infidelity. Meanwhile, Camilla tells Lothario about her concerns regarding Leonela, which makes Lothario realize his mistake. He informs her of his blunder, and she comes up with a plan to trick Anselmo so that she and Lothario will be able to conduct their affair in the open. She goes to the closet to meet Lothario. Knowing that Anselmo is watching, she pretends to stab herself. She pretends she would rather kill herself then sacrifice her purity to Lothario. The trick works, and this lets Camilla carry on with her affair without Anselmo suspecting anything.
As the priest is reading, Sancho comes into the room to announce that Don Quixote has killed the giant who seized Dorothea’s kingdom. The group rushes to see what has occurred, and they discover that Don Quixote is fighting the giant in his sleep and has destroyed a number of the innkeeper’s wineskins, which Sancho has thought were a giant’s head. When Sancho is unable to find the giant’s head, he becomes erratic, crazed by the fear he will not get his governorship.
The priest comes to an end of the story he is reading in the manuscript. Anselmo finds out about Leonela’s affair. To stop Anselmo from killing him, Leonela promises to give him important information the following morning. When Anselmo informs Camilla about his discovery, she flees to Lothario’s, fearful that Leonela will tell Anselmo about the affair. Lothario and Camilla flee. When Anselmo gets up the next morning, he finds that Leonela has run away. He cannot find Camilla, either. He ventures to Lothario’s for help and finds that Lothario has left, too. On his way to a different friend’s house, he finds out about Camilla and Lothario’s treachery from a traveler. Getting to his friend’s house, Anselmo dies as a result of his grief from his loss of honor. The priest makes the announcement that he appreciates the manuscript but thinks it impossible that a husband would be so stupid.
In disguise, Lucinda and Ferdinand arrive at the inn. A tearful scene occurs, and Ferdinand and Dorothea are reunited. Likewise, Cardenio and Lucinda come together again. Ferdinand announces to the company that he and his companions kidnapped Lucinda from the convent where she lived after fleeing from the wedding. He declares his love for Dorothea. Sancho is the only person who doesn’t weep for joy. He rather weeps for what he believes is the loss of his kingdom, now that he and his master know that Dorothea isn’t really a princess.
Sancho is in distress, and he wakes Don Quixote to inform him that Dorothea is not truly a princess and that the giant he challenged in his dreams was only a wineskin. Don Quixote sets aside Sancho’s news only as additional evidence of the enchantment of the inn. He gives Dorothea reassurance that he will be her protector and that it wasn’t necessary for her father to transform her into an ordinary maiden in an effort to protect her from enchantment. He goes on to convey information about his confrontation with the giant, but he stops in the middle of the story, saying that “time, which unveils all mysteries, will reveal this one when we least expect it.” Dorothea claims to Don Quixote that she remains the Princess Micomicona and is still in need of his assistance. As Don Quixote rails against Sancho for his apparent falsehood, a traveler donning the clothing of a Moor—who is from this point referred to as the captive—and Zoraida, his beautiful companion, arrive at the inn. They are looking for a place to stay. The captive says that Zoraida is a Moorish lady of rank who is eager to be baptized. At dinner, Don Quixote delivers a speech about the relative strengths of knights and scholars. He seems so articulate that it’s difficult to believe that he is mad.