The first act of most plays functions as the setup. This is true of act 1 of Arms and the Man as well. It sets up three important things: the setting, the characters, and the main conflict.
The setting of the play is straightforward and mentioned at the very beginning: "A lady's bedchamber in Bulgaria, in a small town near the Dragoman Pass. It is late in November in the year 1885." Using contextual clues and the mention of the year, the audience and readers can infer that the play is set during the height of the Serbo-Bulgarian War, which began in 1882.
The characters are also introduced in this act. We meet Raina Petkoff; her mother, Catherine Petkoff; and their maid, Louka. We also learn of Raina's lover, Sergius Saranoff, who has not yet returned from the battlefield. Later on in the act, we also meet Bluntschli, although he remains unnamed for now.
Finally, this act sets up the major conflict between romanticism and realism. We see the romanticism in Raina at her very introduction, as she sits "on the balcony . . . intensely conscious of the romantic beauty of the night, and of the fact that her own youth and beauty is a part of it." We also see it in smaller scale in her mother, who is described as rather pretentious—a woman "who might be a very specific specimen of the wife of a mountain farmer, but is determined to be a Viennese lady."
The realism is shown through Bluntschli, the Serbian soldier who enters Raina's room, in his matter-of-fact descriptions of life as a soldier and in his tearing down of Raina's fantasy of Sergius as a romanticised picture of chivalry and strength. We also see it in smaller scale in practical Louka, who appears to always be concerned with the here and now, in stark contrast to Raina.