A man impersonating Zorro rides into the village of the Caliente Indians and urges the Indians to revolt by stealing from all of the white men who are not their friends, burning their homes, and driving them away. Zorro tells the Indians that he will return the next night with more information on how they will proceed.
The next day, Don Diego is walking about the plaza and stops for a few moments to speak with Bardoso, a reformed pirate. Bardoso informs Don Diego about the Zorro imposter and also that the new officer at the presidio, Capitán Marcos Lopez, is good friends with a man named Don Miguel Sebastiano, who has recently arrived from San Francisco de Asis. Don Diego thanks Bardoso for the information, thinking that Sebastiano is most likely the fake Zorro.

Don Diego walks to the inn, where Don Miguel taunts him. Don Miguel remarks that Don Diego wastes his time reading poetry. When Don Diego replies that the time is not wasted if a person is intelligent enough to understand what he is reading, Don Miguel smirks and asks if Don Diego does needlework as well. Don Diego replies that when he does it is done with the tip of a sword. The confrontation continues until Capitán Lopez enters the room and berates Don Miguel, telling him that he has forgotten himself. Don Miguel immediately retreats to the corner of the room. Lopez makes a few remarks about Zorro, most likely for Don Diego's benefit, and Don Diego leaves the inn.

Later, Sgt. Pedro Gonzales receives orders from Capitán Lopez that he and his men will ride out to the canyon and remain hidden. Don Miguel will appear as the fake Zorro and will utter treasonable words. The men are to allow Don Miguel to ride away and are to wait in case the real Zorro shows up. If the real Zorro appears, the soldiers are to capture him. Capitán Lopez plans to go to the inn and speak about how Zorro is committing treason and will mention that Don Miguel had too much wine and is sleeping. José, chief of the Cocopahs, is crouching outside the wall and hears all of this. He reports to Don Diego.

Don Diego changes into his Zorro disguise and heads for the inn. Zorro enters and confronts Capitán Lopez, telling him that it is not possible for Zorro to be in two places at once. Zorro is inside the inn, so it will be untrue if someone were to say that Zorro was calling the natives to attack. Capitán Lopez says that the man before him could easily be the imposter. Zorro states that he will prove that he is the real Zorro. The two men fight, and Zorro wins, cutting a Z upon Lopez's face.

Zorro travels to the canyon and waits with José and the Cocopahs for the fake Zorro to leave the canyon. José has found the fake Zorro's clothes and has hidden them. Presently, Don Miguel leaves the canyon after stirring up the Indians once again and heads for the place where he left his clothes. Don Miguel is upset when he cannot find them but before he can look around some more, a rope is looped around him, and the Indians descend upon him. The Indians take Don Miguel back to the pueblo and tell everyone that they have captured Zorro. The Indians make so much noise that many people enter the plaza to see what is going on. When Capitán Lopez sees the man whom the Indians have imprisoned, he is highly dismayed and worried, for he can easily see that the man is Don Miguel. Lopez tries to rush Zorro inside without his mask being removed, but another man grabs off the mask. Lopez tries again to get Don Miguel into the jail, but one of the caballeros mentions that Don Miguel is Lopez's friend and that Lopez could allow Don Miguel to escape. Several caballeros insist upon going inside with Lopez and Don Miguel. Neither Lopez or Don Miguel know quite what to say, and finally, Don Miguel decides that the truth would be best. Don Miguel tells the men that he was masquerading as Zorro in an attempt to bait and capture Zorro. Zorro appears and affirms that Don Miguel's words are correct. Zorro says that Don Miguel must be held accountable for his actions and so Zorro fights Don Miguel. During the fight, Zorro cuts his Z on Don Miguel's cheek and then tells Don Miguel that he must now fight for his life. Don Miguel fights with all the strength that he can muster, but it is not enough. Zorro strikes the death blow, and as Don Miguel falls to the floor, Zorro leans close to him and says in a very low voice, "Needlework, señor!" Don Miguel understands instantly and tries to tell everyone Zorro's identity, but dies before he can reveal it.

Zorro makes his escape and has José ride off to draw the soldiers after him. Zorro stays in the shadows and slips into his home through a secret entrance. He goes to his quarters, changes his clothes, and begins reading a book of poetry. Meanwhile, Lopez has his soldiers surround the Vega home. Lopez is certain that Don Diego is Zorro and plans to catch him sneaking back into his home. Lopez is much taken aback when Don Alejandro and Don Diego emerge and tell the soldiers that they do not need their protection. Since Lopez knows that his plan has failed, he knows that he might as well call off the soldiers and head back to the presidio.