The scene is Seville, Spain, at the end of the 16th century (Overture). Tax collector, soldier, author Miguel de Cervantes and his man, Sancho, are cast into the prison common room by the Spanish Inquisition because they foreclosed on a church in default with its taxes. The thieves and robbers in the prison are quick to descend upon the new arrivals and ravish their possessions. Cervantes concedes everything but a carefully wrapped package of papers that he begs of the prisoners he should be allowed to win back by convincing them that it is of value only to himself. The prisoners agree and assist him in dramatising the fantasies of Cervantes' classic character, Don Quixote (I, Don Quixote).

Travelling with his squire Sancho Panza, the knight-errant tilts at windmills and champions an unwilling harlot named Aldonza, a cook who specializes in all pleasures of the senses. At an inn, Aldonza and the Muleteers sing of their lives and their relationships (It's All the Same). To Quixote's "touched" mind she is the fair maiden Dulcinea, and through his kind words and attention she begins to believe in a better way of life.

Meanwhile, Quixote's family and friends are worried about the effect his madness will have on their futures and fortunes (I'm Only Thinking of Him). His niece, Antonia, the housekeeper, the local Padre decide to send Antonia's fiance Dr. Carrasco, to bring Quixote back to his senses and his home.

Meanwhile, back at the inn, Don Quixote has sent Sancho with a missive for Aldonza. In the letter, Quixote ask for a token of his lady's esteem. Instead of the customary scarf, Aldonza provides her filthy, torn dishcloth and asks Sancho why he follows this madman. His reply is simple: "I Really Like Him." Aldonza leaves and takes a bucket to the well, wondering, "What Does He Want of Me?" The Muleteers watch her laviciously, singing a song to her pleasures (Little Bird, Little Bird).

The Padre and Dr Carrasco arrive, hoping to cure Quixote. But the knight will have none of it. Sancho returns with the dishcloth, which Quixote accepts with reverence. A Barber enters, singing his Barber's Song and encounters the knight. Quixote demands the Barber's brass shaving basin, which he believes to be the Golden Helmet of Mambrino, which makes the man who wears it invulnerable to all wounds - if he is noble of heart. The Padre crowns Quixote with the helmet, to which has been attatched the dishcloth. The Innkeeper agrees to dub Quixote a knight at sunrise. The doctor still wishes to find a cure; the Padre hopes that the cure will note be worse than the disease (To Each his Dulcinea).

Aldonza returns and confronts Quixote about his calling her Dulcinea and the ridiculous thing he does. He replies that he only follows his quest, to attain The Impossible Dream. Pedro, one of the Muleteers, arrives - he is angry because Aldonza has not gone to her bed and slaps her. The other Muleteers arrive to join in the fray and Quixote and Sancho band together to rout the muleteers' attempt to torment Aldonza. Quixote's Dubbing takes place and he becomes known as the Knight of the Woeful Countenance. After his dubbing,

Quixote leaves and Aldonza tends to the wounds of the Muleteers. They are furious at losing the battle and vengefully and brutally rape her. When Quixote is forced to return to the inn after all his possessions are stolen, Aldonza bitterly tells him of the crime and her difficult exsistence (Aldonza).

Trumpets sound and the Knight of Mirrors arrives. It is Dr Carrasco in disguise and as Quixote prepares to battle him, Carrasco shows the knight his reflection, "a madman dressed for a masquerade.... the clown". Reality is so inhumane that the old man retreats and his spirit is overcome with hoplessness. Sancho tries A Little Gossip to lighten the old man's heart. Aldonza arrives and tries to remind him of his Dulcinea and his quest, The Impossible Dream. His mind stirs and he tries to stand - I, Don Quixote - but he fallss to the ground. The Padre prays for him (The Psalm) Quixote's frail body succumbs in his last moment of triumph.

Moved by his story, the prisoners vote that the tale of Don Quixote shall live. They return the manuscript just as Cervantes is called before the Inquisition (Finale).