On the island, Miranda expresses her distress over the sufferings of the sailors drowning in the tempest. Prospero assures her they are safe and then begins to tell her the story of his past, which she has never heard before.

Prospero, however, first asks Miranda what she can remember of being a very young child. She says her memory is hazy, but she remembers she had four or five attendants. Prospero then proceeds to tell her he was once, twelve years ago, the duke of Milan, and she was a princess. He made the mistake of allowing his brother Antonio to gradually take over more and more duties in running the kingdom while Prospero devoted more time to his studies. As Antonio amassed more and more power, he became increasingly ambitious. Finally, he allied himself with the king of Naples to overthrow Prospero: Antonio promised that he would pay tribute to Naples if they helped him take the throne of Milan.

The king of Naples agrees and raises an army that, in the dead of night, overthrows Prospero. Antonio, however, does not dare kill Prospero, because Prospero is beloved by the people. Instead, he puts Miranda and Prospero in a leaky boat and sets them out to sea, assuming that they will drown. Fortunately, the kindhearted Gonzago has equipped the boat with linens and other supplies and, most importantly, some of Prospero's books. Through an act of God, Prospero and Miranda land on the island that then becomes their home.

Miranda asks why Prospero created the fierce storm. He responds that he realized that Antonio was on the boat and saw his chance to right the wrongs that were done to him years ago. He tells Miranda he won't tell her any more now and that she should sleep. After Miranda falls asleep, Ariel (Prospero's magical servant) enters and reports on his success in doing all that Prospero asked of him in terms of frightening the ship's passengers, getting them to shore, separating them into groups, and hiding the ship safely away. Ariel then mentions that he wants his freedom.

Prospero berates Ariel, reminding him that he, Prospero, freed Ariel from the witch Sycorax, who had imprisoned the spirit in a cloven pine; Ariel was in the pine for twelve years for refusing to carry out Sycorax's depraved orders. (It is at this point that we learn of Caliban, Sycorax's son, who is also Prospero's slave.) Prospero threatens to put Ariel back in the cloven pine if he doesn't follow his orders, then promises to free him in two days if he is obedient.

Ariel exits and Prospero tells Miranda, who wakes up, that they need the services of Caliban. Miranda says she doesn't like Caliban, but Prospero says they have no choice, as they need his help. When Caliban arrives, he complains to Prospero about how he once owned the island. He says that he once loved Prospero and taught him everything he needed to know to survive. Caliban then accuses Prospero of betraying him; he claims that, once Prospero had what he needed, he turned on Caliban and unkindly enslaved him.

Both Prospero and Miranda respond harshly to Caliban. Prospero accuses him of trying to rape Miranda, and they both say he only responds to violence (and is not worthy of kindness). Caliban curses them for teaching him their language and, in general, expresses his discontent. Unlike Ariel, he is not grateful to Prospero. Caliban then leaves.

Elsewhere, Ariel, who has made himself invisible, sings to Ferdinand and leads him to believe his father is dead. He also urges him toward where Miranda is. With some prompting from Prospero, Miranda sees Ferdinand. She has never laid eyes on a young man before, and she falls instantly in love. Ferdinand sees her too and also falls in love. Prospero is pleased but wants to put some obstacles in their path to test their love so that it doesn't come too easily. He speaks very harshly to Ferdinand and demands his obedience. As the scene ends, Miranda reassures Ferdinand that her father is not so bad, and Prospero reassures Ariel that if he follows his orders exactly, he will soon be free.