The Spanish King, a Spanish Lord General, the Duke of Castile (the King's brother), and Hieronimo, Knight-Marshal of Spain, return to discuss the aftermath of their battle with Portugal, which is the same battle in which Don Andrea died. When the King asks him to give a report on the status of the troops, the Lord General reports good news: the Spanish troops have gained victory and with "little losse." After congratulations from the King and Castile, the General proceeds to give a run-down of the battle. This includes a more detailed description of Don Andrea's death at the hands of Balthazar, Prince of Portugal and the son of the Portuguese Viceroy which we first heard described by Andrea himself in I.i. The General also relates the subsequent capture of Balthazar by Horatio, Hieronimo's son and Andrea's friend, a capture that resulted in the retreat of the Portuguese forces. The General informs the King that the Viceroy of Portugal has made an offer of conditional surrender, promising to pay tribute to Spain if the Spanish armies cease their attack. The Spanish King seems to accept this offer and asks Hieronimo to celebrate with him the success of his son's capture of Balthazar.
The Army returns from the battle, with Balthazar held captive between Horatio and Lorenzo, son of the Duke of Castile and brother of Bel-Imperia. The two Spaniards hotly contest which one should receive credit for the capture of Balthzar; Horatio, who knocked Balthazar off his horse after battling with him, or Lorenzo, who after Balthzar was cornered persuaded him to surrender using gentle persuasion. Hieronimo, while avowing his partiality, pleads for his son's case. The King ultimately takes a compromise position, giving Balthazar's weapons and horse to Lorenzo, while giving the ransom money Balthazar will bring from the Viceroy, as well as the prince's armor, to Horatio. He also deems that Balthazar will stay at Lorenzo's estate, since the estate of Horatio (and Hieronimo) being too small for a man of Balthazar's stature.
The scene is now at the Portuguese court. The Viceroy and two Spanish noblemen, Alexandro, who is the Duke of Terceira, and Villuppo, enter, having received news of the Portuguese defeat. The Viceroy mourns his son, believing him to be dead, and blames himself for not having gone in Balthazar's place. Alexandro comforts the king, assuring him that the Spanish have probably taken Balthazar prisoner and are keeping him for ransom.
Villuppo then steps in and offers to tell the king the "real story" of what happened at the battle. According to Villuppo, Balthazar was engaged in combat with the Lord General of Spain when Alexandro came up behind him and shot him in the back with a pistol. The story is a complete fabrication, but the Viceroy believes it and asks Alexandro whether it was bribery or the hope of inheriting the Portuguese crown that made him betray the prince. He then sentences Alexandro to die the second he confirms that Balthazar is dead. After the other two characters leave, Villuppo confesses his deception to the audience, explaining that Alexandro is his enemy and that he hopes to gain by his death.
One characteristic of the First Act in general is the way in which the story of Andrea's death is continuously told and retold. The Lord General's version is the second of these, and it contradicts Andrea's own account in tone. For the Lord General, the battle is an almost unabashed success, a "victory, with little loss of life". The clash between Andrea's version and the version of the Lord General create irony, in this case situational irony; contrary to expectations, Andrea's death is not viewed as particularly regrettable at all by the Lord General or the King. Instead, he is just another one of the three hundred or so Spanish soldiers who perish during a glorious triumph for Spain. As the Ghost of Andrea never leaves the stage (or at least is never directed to leave in the text), we can easily imagine this deflation of Andrea's importance being reacted to by a disappointed facial expression in Andrea during the Lord General's speech. Also, the juxtaposition of the Viceroy's grief in scene iii, coming as it does right after the celebration of the Spaniards, adds to this sense of irony, casting the joy of the Spaniards in a bitter light, since it is founded upon the sadness of others. The Viceroy also explicitly introduces the idea of cruel, unkind, arbitrary Fortune. "Fortune is blind and sees not my deserts," says the grief-stricken Viceroy, believing that his son is dead. But we cannot wholly empathize with the Viceroy either, for his situation is founded upon dramatic irony: he believes his son to be dead, when in fact he is not, and is lead by this belief into wrongly condemning an innocent man (Alexandro) to death.
Kyd uses irony throughout The Spanish Tragedy to create a tension in the audience, a tension between the need to identify with the suffering and pain of the characters and the realization that the characters in question are limited or flawed in a way they cannot initially perceive, but one in which we can. He in particular uses dramatic irony to great effect, the irony created when a main character doesn't know certain facts that the audience and perhaps some of the other characters do. The tension arises from the fact that irony creates distance between us and the characters, such as when we see that a character's words don't mean what he intends in a certain context, that he is the subject of an ironic attack, or that because of a lack of information, his actions appear foolish. Despite the characters' ignorance of things which we may very well know, we are still able to identify on a deep level, especially if the character's limitation is one common to most human beings. In the case of Andrea, his limitation seems to be his mortality, his pride, and his lack of knowledge, which prevents him from recognizing that after he dies, he will eventually be forgotten in a world that will move on. In short, he is a limited, finite being, both in knowledge and in time—a condition that defines the human species.