Alonso Quixano's obsession with chivalric romance stories turns into insanity when he gives up his idle days and takes on the persona of a knight-errant named Don Quixote. Armed with shabby armor and a homemade helmet, he and his elderly horse, Rocinante, set off for adventure in the Spanish countryside. He dedicates his career as a knight to a local woman he refers to as Dulcinea del Toboso, despite the fact that he has never spoken to her.
Don Quixote's first excursion is brief. He stays at an inn he believes is a castle, then he returns home to gather supplies and acquire a squire. When he returns to the saddle for his second adventure, he is accompanied by Sancho Panza, a local peasant farmer. Sancho Panza, not the brightest guy in town, doesn't realize that his new master is insane. Blinded by greed and the promise of a governorship for his service, he manages to overlook nearly every odd thing Don Quixote does, including mistaking windmills for giants.
Don Quixote and Sancho Panza meet a number of interesting people on their journey, battle unsuspecting foes, and startle nearly everyone with the knight-errant's obvious insanity. At one point, Don Quixote aids the escape of a group of prisoners headed to the galleys. He and Sancho Panza hide from the police in the mountains where they meet a crazed young man named Cardenio.
Cardenio's introduction sets off a chain of new characters with stories about star-crossed lovers. Don Quixote decides that the best way to show his love for Dulcinea is to perform acts of madness. He sends Sancho Panza to Toboso with a message for Dulcinea, but he is intercepted by Pero Perez and Master Nicolas, a priest and barber from Don Quixote's hometown. Worried about their friend, they devise a scheme to bring Don Quixote home and cure him of his madness. This plan involves a fake princess, an imaginary giant, and several stories-within-the-story about honor, virtue, and love.
Don Quixote is finally delivered to his home via ox cart. He is worn out but still convinced he is one of the greatest knights to ever have lived.
A month of rest does nothing to disabuse Don Quixote of his desire to right the wrongs of the world, and he and Sancho Panza pack their saddlebags for another adventure. They begin in Toboso, where Sancho Panza fools Don Quixote into thinking that an ugly peasant girl is his beloved Dulcinea del Toboso under enchantment.
Now on a quest to free his ladylove, Don Quixote and Sancho Panza meet a rival knight, the Knight of the Mirrors, who says that he has already vanquished Don Quixote. They agree to duel, and Don Quixote wins. The Knight of the Mirrors turns out to be Samson Carrasco, a college graduate who had previously told Don Quixote and Sancho Panza about the publication of their adventures by a Moorish author. Samson Carrasco was working with Pero Perez and Master Nicolas to bring Don Quixote home again, but his plan failed.
Don Quixote and Sancho Panza learn more about love at a wedding and then take a trip to Montesinos's Cave, named after a legendary knight of yore. While in the cave, Don Quixote has visions of Montesinos and other famous knights, as well as of his Dulcinea. Sancho Panza isn't sure whether he should believe his master or not, and an encounter with a prophetic monkey only affirms each of their positions.
Master and squire run into a Duke and Duchess who are completely enamored with the published stories about the lunatic knight. They invite Sancho Panza and Don Quixote to their castle, where they play endless, mean-spirited pranks on the trusting squire and his crazy master. The Duke promises Sancho Panza a governorship, and he is soon sent to Barataria Island where it turns out he's actually a very just and wise ruler. Don Quixote, meanwhile, grows weary of idle life in the castle. When Sancho Panza gives up his position after just ten days, they are both eager to get back to the life of a knight-errant and his servant.
They end up in Barcelona where the Knight of the White Moon challenges Don Quixote. If Don Quixote wins, he can kill the other knight. If he loses, he must retire from knight-errantry for a year. He is beaten soundly, and the other knight turns out to be Samson Carrasco once more.
Don Quixote and Sancho Panza start off for home. Along the way, Don Quixote decides that he should become a shepherd and adopt the lifestyle found in pastoral romances. They are almost home when they hear about a second text written about their exploits, but this particular book wasn't written by the original author. They find fault with nearly everything written and declare it untrue.
Don Quixote falls ill once they are back at home. When his fever finally breaks, he vehemently renounces knight-errantry and chivalric romance stories, mourning the good, wholesome books he never got a chance to read. He abandons the name Don Quixote and goes back to being Alonso Quixano once more. He dies the next day.