Don Moreno's wife happily welcomes Ana Felix into her home, and the girl draws many people to visit who admire her beauty and intelligence.
Don Quixote, meanwhile, does not believe the plan to rescue Don Gregario is a good one. He asks his host to allow him to rescue the man, for he can triumph over a thousand Moors. Sancho points out that the rescue is complicated by the fact that the sea separates the two countries. Don Moreno tells Quixote that if the renegade does not prove successful, then Quixote can have his chance.
While strolling along the beach, Don Quixote is approached by another knight, who identifies himself as Knight of the White Moon. He challenges Don Quixote to prove his arms and to force Quixote to admit that his lady is fairer than Dulcinea. In addition, if the other knight triumphs, he wants Quixote to retire to his village for a year and go on no more adventures. If Quixote wins, he can take the knight's life and spoils, as well as his achievements.
Don Quixote tells the knight he would not challenge him if he had seen Dulcinea, but he accepts the challenge. If he defeats him, he doesn't need to take over his achievements, for his own are mighty enough.
The viceroy has heard about this new knight, and fearing it is some prank of Don Moreno's, rushes out to greet him. He asks the Knight of the White Moon if this is a joke. The knight denies it. The viceroy is perplexed, but he allows the challenge to proceed.
The two knights charge at each other. The Knight of the White Moon's horse is faster, and he knocks both Don Quixote and his horse to the ground. He tells Quixote he is vanquished. Don Quixote refuses to admit that the knight's lady is fairer than Dulcinea. He cannot lie just because he wasn't strong enough to be victorious. The Knight of the White Moon is free to kill him.
The Knight of the White Moon isn't interested in that part of the terms. He merely wants Don Quixote to retire to his village for a year. Don Quixote agrees. The other knight gallops off. The viceroy sends Don Moreno to discover the identity of this other knight.