This border inn was the favourite resort of certain officers and soldiers in the town, who, knowing nothing of the smuggling tendencies of the landlord, went to dance and amuse themselves with the pretty gipsy girls who frequented the place. Amongst these officers was Zuniga, the Captain of the Guard, who was so fascinated by the tantalizing charms of Carmen that he made no attempt at her recapture, preferring to make love to her instead; but the careless coquette would have nothing to say to him, until he came one evening with the news that Don José had been set at liberty and allowed to return to his regimental duties. Then she condescended to smile on the captain, for she was delighted to hear of her self-sacrificing lover's freedom, knowing well that he would certainly seek her out at once; and the foolish Zuniga went away happy, imagining that he had made a conquest.
That same evening a grand torchlight procession in honour of the most popular Toreador in Seville, a gay, handsome youth named Escamillo, took place; and on passing the border inn, the Toreador and his friends stepped within. Being greatly struck with the enticing beauty of Carmen, the gay Escamillo made advances to her, seeking her good favour; but the pretty gipsy, though pleased with his handsome looks, would neither accept nor refuse his admiration, all her thoughts for the present being centred on Don José, who she knew would visit her that night.
When the Toreador, soldiers, and other customers had departed, the landlord brought in his smuggler friends to talk over a new enterprise, with which they desired the gipsy girls to help. To their astonishment, Carmen flatly refused to join them that night, declaring that she meant to wait within the inn for her lover; and in spite of her companions' expostulations and entreaties, she still clung to this resolution. Then the smugglers, knowing that threats were in vain with the fearless gipsy, suggested that she should persuade her lover also to join their expedition; and Carmen gladly agreed to this, bidding them wait for her in an adjoining room.
No sooner had the smugglers retired than she heard Don José's voice outside; and opening the door quietly, she was next moment clasped in her lover's arms. Then, whilst the young brigadier refreshed himself with the food and wine she placed before him, Carmen sang and danced in her most enchanting manner, and Don José, more in love than ever, applauded her with great delight.
But suddenly he heard the bugle call outside, sounding the recall; and knowing that this was the signal for all soldiers to return to the barracks, he rose to bid his sweetheart farewell for the night. Then Carmen was offended, saying he could not care for her or he would not be so anxious to leave her side; and in spite of Don José's explanation that his soldier's duty alone compelled him to go, she scornfully refused to listen to him, declaring that if he truly loved her he would be willing to remain, and to follow her wherever she might lead.
Employing her most practised arts of coquetry, she tempted him to give up all and fly with her and her smuggler friends to the mountains, to live the rover's life of excitement and danger, declaring that, otherwise, she would never see him again; and the poor young brigadier was nearly distracted, for, though enthralled by love, yet he could not bear to think of deserting his regiment.
Just then there came a knock at the door, and Zuniga, Captain of the Guard, entered, having come for another farewell greeting from Carmen before returning to the town; but on encountering Don José, he haughtily ordered the youth to instantly rejoin the departing soldiers, who were again sounding the bugle call. But Don José, angry at the interruption, passionately refused to go, and next moment their swords were clashing together.
Carmen triumphant at the victory she had gained, knowing that Don José at last was hers, called aloud for help, and when the smugglers rushed into the room, she made them seize and bind the unfortunate captain so that he should not interfere with their plans. Don José, now completely under the spell of Carmen's fascination, was next invited by the smugglers to join their enterprise, and upon his agreeing to do so, the whole party set off to their rocky retreat in the mountains.
Here, amidst a wild, picturesque country, the smugglers plied their illicit trade with success for some time; and Don José, though often filled with remorse for his lost position, and tortured by the thoughts of his lonely mother, who still believed in his honesty, found relief in the frequent danger he was exposed to, and delight in the constant society of Carmen. In spite of the fact that she had caused him to desert his regiment and become a smuggler, ruining his character for ever, he still passionately loved the beautiful gipsy girl; but Carmen's fickle affection grew cooler each day, and having lost the excitement of pursuit by conquest, she already wished for a new lover, and began to think tenderly of the handsome Toreador who had besought her favour at the inn. But as Carmen's love grew colder, the more passionately did Don José long to keep it, and in spite of her taunts and slights, he declared that she should not cast him off, since he would never leave her side. However, he was at last compelled to do so; and the faithless gipsy rejoiced at the chance circumstance that took away from her the lover she had grown weary of.
One day Don José was set to guard the entrance to the smugglers' haunt, and seeing a stranger climbing up the mountain-side, he raised his gun and fired. The stranger, however, leaped aside and avoided the shot, and next moment he sprang to the ledge beside his assailant, and announced himself as Escamillo, the Toreador.