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The scene switches back to Spain, where Bel-Imperia and Horatio are walking together in her garden. Bel-Imperia was Don Andrea's lover, and she asks Horatio to tell her how he died. So Horatio recounts the story of Andrea's death for the third time in the play, now emphasizing how Andrea was outnumbered by Balthazar's horsemen, thrown from his horse, and then quickly finished off by Balthazar. Then Horatio continues with how he took Balthazar prisoner and retrieved Andrea's corpse. He then describes how he took Andrea's lifeless corpse back to his tent, futilely attempting to revive his friend with his tears and then finally giving Andrea the funeral rites he deserved.
Horatio also recounts how he took a scarf from Andrea and now wears it in remembrance of his friend. Bel-Imperia reveals that the scarf was originally hers and that she gave it to Andrea when she last saw him before he went off to war so that he could wear it in battle as a keepsake. She asks Horatio to wear it now, for both her and Andrea. Horatio then tells her he must leave to go seek Balthazar. When he is gone, Bel-Imperia confesses that she now loves Horatio but still wishes to avenge the death of her first love Andrea. This she will do through her love for Horatio, since we now learn that Balthazar, the man who slew her husband, is in love with her.
That man, Balthazar, soon enters with Lorenzo, who asks his sister Bel-Imperia why she looks so glum, for the prince has arrived to see her. She then exchanges several lines with the prince, in which his love and her barely repressed hatred become apparent. Bel-Imperia finally tires of Balthazar and leaves, but as she does so, she drops a glove, which Horatio, coming in again, picks up off the ground. Bel-Imperia tells him to keep it. Lorenzo then consoles Balthazar, telling him that women are fickle. Horatio, Lorenzo, and Balthazar then leave to attend the feast being held at the Court for the Portuguese ambassador.
The King and Portuguese ambassador both enter. The Portuguese ambassador, upon seeing Balthazar, remarks how the Viceroy of Portgual mourns his son. Balthazar replies that the only thing he has been "slain" by is the beauty of Bel-Imperia. The King remarks upon his newfound goodwill for Portugal, now that they have paid their tribute to him. He then wonders aloud where Hieronimo, the Knight-Marshal was supposed to provide entertainment for the guests, is.
Hieronimo then enters, followed by actors who perform a masque that he has prepared. The masque consists of three knights, each with an escutcheon (a shield with armor). Hieronimo then brings in three kings, each of whom has their crown stolen by one of the knights. When the King asks what the scene is supposed to mean, Hieronimo explains that each king and knight represents a scene from Spanish and Portuguese history, in which either Portugal or Spain were defeated by "little England." The first knight represents Robert, Earl of Gloucester, who during the reign of King Stephen subdued the "Saracen" King of Portugal. The second knight re-enacts Edmund, Earl of Kent's conquest, during the time of King Richard, of the Christian king of Portugal. And the third represents John of Gaunt's capture of the King of Castile (the royal family that later went on to assume the monarchy of Spain). After each Portuguese defeat, the Spanish king makes patronizing remarks to the ambassador, to the effect that Portugal shouldn't be upset by its latest defeat at the hands of Spain, having already been defeated by "little England." After the third act, the Portuguese ambassador makes a remark that the Spanish should not be too arrogant in their victory, having also been defeated by England. The King then proposes a toast, and the guests leave to commence their feast.
Don Andrea accuses the ghost of not fulfilling his promise; instead of witnessing Balthazar's brutal death, he instead has seen the prince feast and be merry. Revenge reassures Andrea that Balthazar and Lorenzo's current happiness will, before the play is over, turn into misery.
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