Quixote's niece Antonia seeks to have her uncle declared insane and confined to an asylum. Sancho Panza, a simple, dim-witted laborer from the village, also enters and reveals that he was Quixote's loyal squire as the delusional hidalgo imagined himself to be a wandering knight. He re-enacts this journey along with Aldonza, a hardened prostitute whom Don Quixote idealizes as his pure and unattainable beloved, Dulcinea.
While in the prison courtyard re-enacting a joust, Quixote is accidentally knocked to the ground and suffers head trauma. During his delirium, Antonia and the Padre decide that he can be safely let go as he no longer believes he is a knight. However, when Quijano regains his sanity and realizes he is no longer his alter-ego, he denounces the "real" world as madness and resolves to return to the noble fantasies that had given his life meaning and distinction. Sancho convinces Aldonza to join them and she willingly becomes Dulcinea. The couple prepares to leave, and the Padre warns them that while madness may bring joy, sanity will inevitably follow. Quixote assures him "To dream the impossible dream".
As the curtain falls, Quijano and Aldonza/Dulcinea join Cervantes and the other inmates in dancing and singing, embracing their dreams no matter how unrealistic or "impossible" they may be.