Don Sebastian, a friend of the de la Vegas, is growing impatient at the delay of the stage to Monterey, for he is carrying a purse full of gold and is afraid it may be stolen. While waiting in the tavern with Diego, he makes the mistake of mentioning the gold and is overheard by three crooked entertainers.
The recovering governor is beginning to become irritated by his confinement to the de la Vega home. At times it seems as if the only thing that can pacify him is a music box. Almost as soon as it begins to play, the governor falls asleep. Knowing that the Rebatos are still trying to kill the governor, Diego uses the box to lull him to sleep then Bernardo moves him to safety.
Capitan Arrellanos continues his attempts to rule California by hiring Carmelo, a recent arrival to the pueblo, to kill the governor. Diego and Bernardo overhear the plan but don't act at once, hoping instead to learn who the other conspirators are. The governor has begun to recover and spends his time sitting outside on the patio, which prompts Don Alejandro to give a party to celebrate his better health.
Capitan Arrellanos refuses to help the Rebatos any longer in their attempts to kill the governor. Instead, he chooses another plan designed to make him the head of the government. He asks the governor's daughter to declare her father too ill to continue in office. Furious at this request, Leonar refuses to cooperate. She then tells her father of the aide's plot.
The governor of California is attacked during a visit to Los Angeles with his daughter and aide, and barely escapes with his life. Taken to the de la Vega house to recover, he is much too weak to travel for several days. The aide, Capitan Arrellanos, tells Diego he suspects the attack to be the work of the Rebatos, a group that wants to sever ties with the government in Spain.
Sergeant Garcia returns from escorting Padre Simeon on a trip from San Diego and is surprised to find that almost everyone in Los Angeles has contracted the measles. The doctor has placed the entire pueblo under quarantine and restricted residents to their homes. Even the soldiers cannot leave the cuartel.
Pedro Avila, recently arrived in the pueblo, earns a meager living by betting other men that he can beat them in a sword fight. He tries to talk Diego into betting, but Diego refuse, as Diego knows he must keep his skill a secret. This gives Avila and his friend Tony Pineda an idea about how to get rich. They plan to force Diego into a duel, then allow the frightened man to buy his way out of the situation.
Humiliated by Zorro, Basilio gets his revenge by arresting Sergeant Garcia and hoisting him in the air in the public square outside the cuartel. A large sign dares Zorro to rescue Garcia, but Diego knows Basilio will have hidden lancers throughout the area. When night arrives, so does Zorro, using Bernardo to help create a diversion that draws the soldiers out of town.
Thought to be hiding safely in the hills, fugitive Joe Crane instead has sneaked back into the pueblo hoping to recover his hunting rifle and the load of furs he gathered during the trapping season. He also wants to see Carlotta, the barmaid who accidentally started the fight between him and Don Carlos Fernandez.
Estevan still hopes to marry the wealthy Margarita but he knows that Zorro will continue to oppose him. Don Alejandro suggests that if Estevan were to settle down and begin farming, Zorro would realize that his intentions are honorable. He gives the visitor a small plot of land and wishes him well in his endeavor.
Still hoping to strike it rich during his visit to Los Angeles, Estevan shows a great deal of interest in a young woman when he learns she comes from a wealthy family. Don Alejandro accuses Estevan of only being attracted to Margarita because of her money, but the suitor denies the charges, forcing Diego to dress as Zorro in an attempt to frighten Estevan away.
Estevan again becomes a problem for Diego when he decides to earn some easy money. Los Angeles is preparing for its annual horse race and Estevan would like to win the prize money, but his horse seems unlikely to win. His luck changes when he comes across Zorro's horse, Tornado, grazing in a hidden field, and he captures the animal.
Diego's uncle, Estevan de la Cruz, arrives in Los Angeles for an unannounced visit and surprises the de la Vegas when he tells them he plans to be their house guest. Furthermore, he expects them to give a lavish party to welcome him. All of this angers Don Alejandro, but to head off a family dispute, Diego convinces his father that Estevan will leave soon.
It is time to send the tax money to the governor, and Sergeant Garcia has a plan to thwart any attempt to steal the funds during the long journey. He orders the town blacksmith to build a huge iron box that requires a special key to open it. The money will be placed in the box and the key sent to the governor by a separate route.
Two indentured servants who wish to marry find that the law states they must have the permission of their masters. Buena, who works in the de la Vega hacienda, is told she is free to marry, but her boyfriend, Romaldo, is not so fortunate. One of his co-workers also wants to marry Buena so he convinces their boss that Romaldo plans to run away after the ceremony.
Ricardo leaves town but causes another problem for Diego before he goes. Still infatuated with Anna Maria, Ricardo tells her that Zorro would unmask himself if he really loved her. The problem is, Diego does love her, and thus begins to consider turning himself in. The governor offers the outlaw amnesty if he will surrender himself at a public ceremony.
Ricardo asks for Diego's help in winning Anna Maria's heart, for he feels Zorro is too much competition for the two men to overcome. If they can make it seem that Zorro is seeing another woman, Anna Maria will scorn him, thus dropping the field of suitors to a more manageable size. Ricardo plans to accomplish this by dressing as Zorro and serenading Anna Maria's cousin, Milana del Carmen.
Anna Maria Verdugo returns to Monterey from San Francisco and becomes the object of Ricardo del Amo's affection. This friend of Diego's is an incurable practical joker. Ricardo realizes that Diego is also attracted to Anna Maria and hopes to lessen the competition by having some fun at his friend's expense.
The broken truce has convinced Joaquin that Diego cannot be trusted and, that if not for Zorro, he would have been killed. When Diego and Bernardo ride to his camp to explain, the rebel leader orders his men to lock the visitors in leg irons until he can decide upon a suitable fate for them. Joaquin announces his plans to kill the governor the next day while he visits a local shrine. When he tries to ride there, however, Joaquin is accidentally captured by Sergeant Garcia.
Capitan Briones escalates his campaign against Joaquin by ordering that a peon be whipped until he reveals the rebel's hiding place. Zorro uses his own whip to stop Briones, then frees the peon. Shortly after, the real governor returns and Rico explains that his harsh rule was only imposed to make the capital a well-run city. Rico then convinces the governor to offer the rebel a truce so he can explain his case, planning all the while to kill Joaquin as soon as the outlaw turns himself in.
Joaquin and several followers begin a series of raids against the Especials, which culminates with the beating of Capitan Briones. The soldier issues a death order for Joaquin and sends his men after Theresa, intending to force her to reveal his hiding place. She asks Diego to hide her, and with Garcia's assistance, he protects her from the searchers.