Act 1 of Biloxi Blues begins aboard an old train's coach. It's the year 1943, and five soldiers, new recruits from the Northeast, are on their way to boot camp in Biloxi, Mississippi. After completing basic training, they are destined to join the fight in World War II. The soldiers are discontent, anxious, and uncertain about what lies ahead.

Upon arrival at the camp, the recruits settle into their barracks. Almost immediately, Sergeant Toomey, the leader of their company, enters. He starts to berate the soldiers, who have yet to receive any military training and are unfamiliar with proper conduct. The privates quickly begin to understand the workings of Sergeant Toomey's army, where he punishes randomly and unjustly. He fuels discord among them by making everyone except Eugene do push-ups. Early on, Arnold stands out as the defiant one, refusing to eat the mess hall food despite knowing it will result in punishment.

One night, Eugene suggests that each soldier share what they would do if they had only a week left to live. They each put in five dollars, and Eugene picks the best fantasy. He chooses Arnold's vision of making Sergeant Toomey do two hundred push-ups in front of the platoon. However, the soldiers bicker over whose fantasy is the best. Wykowski makes offensive remarks about Jews, prompting Arnold to demand he stop. As tensions rise and a fight looms, Sergeant Toomey intervenes and quells the dispute, stating he will not tolerate racial slurs. Afterward, Eugene feels guilty for not defending Arnold, who is also Jewish.

In the following scene, the soldiers prepare for a forty-eight-hour leave. Wykowski discovers all his money has been stolen from his wallet and accuses Arnold of theft. Toomey enters the barracks, demanding the thief confess, or no one will be allowed to leave the camp. Arnold takes out sixty-two dollars from his wallet. Toomey asks why Arnold would return the money knowing he could face severe punishment. Then, Toomey reveals he was the one who took the money to teach Wykowski a lesson about leaving valuables unsecured. Despite Arnold's false confession, he is confined to the barracks. The other soldiers are puzzled by Arnold's "confession." Arnold explains that he would have been punished regardless, as Toomey aims to break his spirit. Wykowski respects Arnold for taking the fall for the platoon. Eugene admires Arnold's principles, but Arnold advises Eugene to stop being a bystander and engage with the events around him.