The dining room of the Waldner's hotel room As Zdenka fends off creditors at the door, her mother Adelaide consults a fortuneteller. The precarious finances of the once-wealthy and aristocratic Waldner family can only be remedied by an advantageous marriage of Arabella, the other daughter. Zdenka herself must dress as a man to save on the expense of bringing up and marrying off two ladies. The soothsayer's predictions are ambiguous – she vaguely envisions a rich suitor who lives a great distance away. But in the vision, the proud girl will not consent. There is a different man blocking the way, and another sibling proves to be a threat as well.
As Adelaide leads the fortuneteller to another room, the young officer Matteo enters, despondent. He loves Arabella, but she does not respond to his affections. Zdenka assures him that there is hope and offers her assistance. But if something doesn't happen soon, Matteo is prepared to ask for a transfer to a remote battalion, or even worse, take his own life.
After Matteo leaves, Arabella returns from a stroll. She casually acknowledges the roses Matteo has brought, as well as tokens left by her suitors, Counts Elemer, Dominik and Lamoral. Though Zdenka secretly loves Matteo (but her ongoing male attire prevents any further action), she promotes his finer qualities to her sister, reminding her that she was once fond of him. Arabella remains indifferent to all of her admirers – she will know in her heart when the right one comes along. From an earlier walk she recalls attracting the attention of a stranger, from whom she expected to receive flowers.
Count Elemer arrives to take Arabella on a sleigh ride. He has also "won" the right to escort her to the Coachman's Ball. The young lady chafes at being auctioned in such a low manner as drawing lots and admits that none of her admirers has unchained her heart. Yet she must decide that evening.
While Elemer waits outside, Arabella again spots the mysterious stranger out the window. She and Zdenka prepare themselves for the ride. A downhearted Waldner returns, ruing his financial state, and rummages through the many bills. He had once written to his army friend, the elderly and wealthy Count Mandryka, hoping he might be generous and marry his young daughter. He had enclosed her photograph.
Waldner further laments his self-induced, impoverished condition when a waiter delivers a card – it is from Count Mandryka. Waldner is surprised that the visitor is not the old man, but his nephew, who is both namesake and sole heir. The letter and photo have passed to him, and he has traveled all the way from Slavonia to seek the hand of Arabella in marriage. Waldner promises an introduction that evening, and they depart.
Arabella returns and quietly reflects upon her situation. Not one of her suitors is especially appealing. The unknown man who has been observing her is the most intriguing prospect, though he is probably married, and she may never see him again. She hopes the ball will brighten her mood.
A public ballroom Mandryka is introduced to Arabella, and his restrained but direct country manner is soon made apparent. As he confides personal details about himself – he is a widower with vast estates – and his devotion to her, she comes to realize that he could indeed be the right man and reciprocates his love. Mandryka begs her to leave with him at once, but Arabella wishes to stay for one last night as queen of the ball. He orders champagne and flowers for everyone as she bids farewell to her other prospective mates.
As Arabella revels in the spotlight, Matteo desperately looks for any sign of affection. Zdenka tries to console him with a letter from her sister, which really contains a key to Arabella's bedroom. Mandryka overhears the exchange and is angered by Arabella's apparent lack of constancy. He soon receives a note that she has retired for the night. Disillusioned, Mandryka abandons himself to the champagne and flirts with another woman, while making gibes at Arabella's loose morals. The Waldners are shocked by this recent turn of events and quickly escort him back to the hotel to clear the matter up.
The hotel lobby Arabella returns to the hotel distracted by happy thoughts of her future country life and unaware that Matteo has been in her bedroom, presumably with her. As Matteo tries to leave with discretion, he is astonished to find Arabella in the lobby wearing her evening attire. He is also stunned by her cold attitude toward his new familiarity in the aftermath of what he believed to be passionate lovemaking. The Waldners return with Mandryka, who immediately begins to deride Arabella for her infidelity. She is baffled by his outrage and protests her innocence. In the anger and confusion, duels are proposed by all three men.
The situation is mitigated by the appearance of Zdenka, disheveled in her negligée. To prevent Matteo's imminent suicide, she has pretended to be her sister and now wishes to throw herself into the river. Her family forgives the deception as does Matteo, who finds he has romantic feelings for his once-male friend. Mandryka looks to Arabella for some sign of forgiveness, but she coolly retires to her room, asking only for a glass of water. As Mandryka deprecates himself for his rash behavior, she reappears. In the custom of his village, she offers him the water-filled vessel, a symbol of her love and purity. It confirms their engagement, and pledges their fates to be united forever.