Act two opens in the garden of Major Petkoff, Raina's father, on a spring morning in 1886. Nicola, another servant, lectures Louka about the hierarchy of the Petkoff family and their role within it. She rejects Nicola’s words, continuing to express her disdain for Catherine and insulting Nicola.

Eventually, Major Petkoff returns home from the war. He announces that a peace treaty was signed, but Catherine is not pleased, outraged by the prospect of peace, and expresses her preference for an absolute victory instead. Petkoff explains he had little say in the matter and emphasizes that while the treaty signifies peace, it does signify not friendly relations.

Despite her initial anger, Catherine softens when Petkoff expresses how much he missed her during the war. She then changes topics, expressing that her future son-in-law should be promoted so their country can have "at least one native general." Perkoff disagrees, dismissing Sergius as reckless and unfit for such a command during wartime.

At this moment, Sergius arrives. Possessing both the physical hardiness of a mountaineer and the refined characteristics of a civilized man, Sergius is Raina's—as well as Catherine's—ideal image of a hero. He warmly greets his soon-to-be in-laws as Catherine showers his military exploits in the recent campaign with praise. Sergius, however, downplays his achievement:

"I won the battle the wrong way when our worthy Russian generals were losing it the right way. That upset their plans, and wounded their self-esteem. Two of their colonels got their regiments driven back on the correct principles of scientific warfare. Two major-generals got killed strictly according to military etiquette. Those two colonels are now major-generals; and I am still a simple major."

Catherine maintains her support for Sergius but is shocked when he announces his decision to resign from military service. Both she and the Major urge Sergius to withdraw his resignation, but he remains adamant. He then changes the topic by asking for Raina's whereabouts; she then enters the scene as if she had been listening, waiting for an invitation.

Sergius goes to meet her with a chivalrous gesture, and the pair exchange a respectful but tender greeting. Petkoff, proud of Raina, praises her impeccable timing. However, Catherine deems her habit of eavesdropping abominable. Raina's admiration for Sergius' military exploits is evident. In response, Sergius expresses a cynical perspective on both war and his decision to resign from the military.

The men then share an exciting story about how a Swiss officer in the Serbian army got the better of them in a horse trade. Worried about the strange soldier, Raina and Catherine pretend to have no idea that there were Swiss mercenaries in the Serbian army. At Petkoff's prompting, Sergius shares another story he heard from a friend about a Swiss soldier. Apparently, a story is circulating through the army about a Swiss mercenary who hid in the bedchamber of a Bulgarian woman after Sergius' cavalry charge.

"She very modestly entertained him for an hour or so and then called in her mother lest her conduct should appear unmaidenly. The old lady was equally fascinated; and the fugitive was sent on his way in the morning, disguised in an old coat belonging to the master of the house, who was away at the war."

Catherine and Raina pretend to be horrified that their own countrywomen could do something so unpatriotic. Raina, as a way to hide her involvement in the story, chastises Sergius for telling such a crude story:

"Your life in the camp has made you coarse, Sergius. I did not think you would have repeated such a story before me."

They then briefly discuss military matters before Catherine suggests Sergius stay to spend time with Raina. Catherine and Petkoff head inside, and Raina exits to prepare for their outing. Left alone with Louka, Sergius engages in a flirtatious exchange, emphasizing the contrast between his public role and private desires. Louka admonishes Sergius, telling him not to be so flirtatious with her. She also hints that Raina has feelings for another man and only publicly pretends to be affectionate with Sergius.

Continuing, Louka says that Raina intends to marry the mysterious gentleman. In a moment of vulnerability sparked by her unkind words, Sergius physically and verbally assaults Louka, only to then immediately apologize. Louka, however, demands more than a verbal apology. Sergius offers money, but Louka seeks a symbolic gesture and presents her bruised arm for a kiss, to which Sergius vehemently refuses. Raina, returning amid the tension, witnesses the aftermath. Louka continues with her duties with dignity.

Catherine returns, telling Sergius that Petkoff has requested him in the library, wanting his advice about a military matter concerning troop movements. He tells Raina he will return soon and exits. Once they're alone, Catherine scolds Raina about the Swiss mercenary. The two women argue, and Raina says she would not care at all if Sergius found out about the soldier.

Raina exits and Louka arrives, announcing to Catherine that Captain Bluntschli, a Swiss officer in the Serbian army, has arrived and wants to see her. When she lays eyes upon him, she immediately realizes he is the soldier Raina hid a year earlier. Catherine tells Bluntschli that he must leave immediately. Bluntschli is understanding, saying he only came to return the coat Raina gave him as a disguise. To Catherine's horror, Petkoff enters the room. However, he and Sergius already know Bluntschli and are on good terms, so the interaction is not uncomfortable. The men insist Bluntschli stay and help them solve the military issue they have been struggling with.

Raina enters the room and, in a moment of surprise, exclaims: "Oh, the chocolate cream soldier!" She covers her slip of the tongue with a hasty joke about cooking dessert and Nicola's incompetence. On cue, Nicola arrives with Bluntschli's luggage. Although he followed Catherine's orders perfectly, she still scolds him for his incompetence. To Catherine's despair, Petkoff insists that Bluntschli continue to stay with them.