Act 1 of Biloxi Blues opens on the coach of an old railroad train. It is 1943, and inside the coach are five soldiers, new recruits from the Northeast, who are being transferred to boot camp in Biloxi, Mississippi. After basic training, they will be sent to fight in World War II. The soldiers are grumbling, unhappy, and apprehensive about what the future holds.

The new recruits arrive at the camp and enter their barracks. Almost right away, Sergeant Toomey, who is in charge of their company, comes in. He begins harassing the soldiers, who have not received army training and do not act appropriately. The privates immediately begin to learn how Sergeant Toomey's army works. He punishes randomly and unfairly. He stirs dissent among the privates by making everyone but Eugene do pushups. Early on, Arnold emerges as the rebel. He refuses to eat the food served at the mess hall, although he knows he will be punished.

One evening, Eugene proposes that each soldier share his fantasy of what he would do if he only had a week to live. They each contribute five dollars, and Eugene chooses the winner. Eugene selects Arnold's fantasy as the best—making Sergeant Toomey do two hundred push-ups in front of the platoon. However, the privates argue about whose fantasy is the best. Wykowski makes derogatory comments about Jews. Arnold refuses to allow Wykowski to talk that way. As the two men are about to fight, Sergeant Toomey comes in and breaks it up. He says he will tolerate no racial slurs. After he is gone, Eugene feels badly because he didn't stand up for Arnold, a fellow Jew.

In the next scene, the soldiers are about to go on a forty-eight-hour leave. Wykowski realizes that somebody has stolen all his money from his wallet. He declares that Arnold is the thief. Toomey comes into the barracks and demands that the thief step forward, or no one will be allowed off the camp. Arnold takes sixty-two dollars out of his wallet. Toomey asks why Arnold decided to return the money knowing that he could be severely punished. Then Toomey tells the privates that it was he who stole the money, not Arnold. He wanted to teach Wykowski a lesson about not leaving valuables around to tempt his fellow soldiers. Because Arnold confessed to a crime he did not commit, however, he is confined to barracks. The other soldiers don't understand why Arnold "confessed." Arnold explains that he would have been punished anyway, because Toomey is trying to break his spirit. Wykowski appreciates that Arnold stuck his neck out for the platoon. Eugene admires Arnold for his principles, but Arnold tells Eugene that he needs to stop being a spectator and get involved in what is going on around him.