Mexican bandits fleeing north to California under the leadership of clever and charismatic El Cuchillo ride into Los Angeles and decide to steal a shipment of silver. Don Diego quickly becomes suspicious of them and saves the day as Zorro, but the sword fight between El Zorro and El Cuchillo has to be aborted when Sgt. Garcia and his lancers arrive. Nevertheless, Zorro leaves Cuchillo with a "Z" slashed into his coat and a warning to get out of California.

El Cuchillo and his men return to Los Angeles to loot the city, but Zorro is prepared for them and deals with the bandits one by one, leaving another "Z" on El Cuchillo's coat just as he is leaving the tailor shop after getting it repaired. After several more attempts that are all thwarted by Zorro, El Cuchillo goes to the de la Vega hacienda and holds the family for ransom. Eventually Bernardo helps Don Diego escape and the final swordfight ensues between Cuchillo and Zorro. But not before the bandito realizes that Don Diego and Zorro are one and the same.

Ramon Castillo, an old enemy of Don Diego's, arrives from Spain and tries to steal the army payroll from Sgt. Garcia. Though thwarted by Zorro, he recognizes the fencing style as Diego's and tries to convince Sgt. Garcia that Diego is Zorro. It is only with great difficulty - and Bernardo's help - that Zorro manages to decisively beat Castillo in a swordfight while Diego appears to be safely locked up in a jail cell.