Lupe, a 16-year-old, and Della, here 17, enter. Henry is curious why Della has come there, since he was supposed to pick her up at home, but she simply says, "You know how my father gets." Henry's mother Dolores sees Lupe is wearing a very short skirt and gasps. Suddenly, Enrique, Henry and Lupe's father enters, and orders Lupe to change. "I don't want to look like a square," Lupe protests, but Henry advises his sister to do as their father says.
Henry introduces his parents to Della, whom they note is very different from his previous girlfriend, Bertha, who apparently had a tattoo. Enrique tells his family that he's going to have a group of friends over soon in celebration of Henry joining the army. Rudy, Henry's brother, enters in a zoot suit made from Enrique's coat and Enrique protests. Henry tells Rudy that when he leaves for the Navy he will give his brother his zoot suit, but Rudy says he will get his own. Before they leave, Enrique tells Henry not to let Rudy drink beer.
Pachuco begins singing again, and the stage is transformed into the dance, as Henry and Della dance in the center, and Joey Castro, Smiley Torres, and Tommy Roberts, a white guy, all come in.
Scene 5. The Press. Back in the present, a newsboy enters yelling about the murder. Edwards enters with Alice Bloomfield, a 26-year-old reporter. Alice asks Edwards more about the Sleepy Lagoon, and he tells her it's a dried-up reservoir and "serves as a swimming hole for the younger Mexican kids" since they are not allowed to swim in other places. Edwards speaks to a member of the press and tells them that he thought that Henry had a lot of promise, but that he was wrong.
Scene 6. The People's Lawyer. Joey, Smiley, and Tommy are in jail. They complain about the fact that they are always getting put in jail. Joey says that at least now people will think of them as the toughest gang. Joey and Tommy then begin calling each other gay and making fun of one another, sparring. The group discusses the fact that the only gang member that wasn't arrested is Rudy, even though he was at the Sleepy Lagoon that night. Henry tells the other guys not to mention that Rudy was there that night, as he doesn't want his brother to get in trouble.
George Shearer, a middle-aged people's lawyer, comes in and introduces himself as the lawyer in charge of their case, hired by their parents. The boys are suspicious of him, convinced that he's a cop. He tells them that the first murder case he worked on was for a Filipino, for which he got paid $3.50 plus a pack of Lucky Strike cigarettes, then tells them that he's been hired by a citizen's committee that's formed on their behalf.
When the boys refuse his help, George says, "The D.A.'s coming after you, son, and he's going to put you and your whole gang right into the gas chamber." He asks Henry to trust him, but Henry says, "Why should I? You're a gringo." George begins to speak in Spanish, which surprises the boys. He suggests that they have no idea if he's white or Spanish or Arab or Jewish, but that it doesn't matter, because he wants to help them. The boys agree.
George asks to hear what happened, and Henry tells him. The play moves back in time to the dance. As the couples dance to swing music, Bertha, Henry's ex-girlfriend, asks him to dance with her, but he refuses. Smiley walks up and mentions that the Downey Gang is there. Bertha insults Henry, saying that he's changed since he joined the Navy and he grabs her by the arm, but she walks away.
As Latin music plays, Lupe tells Henry that Rudy is very drunk again, but Henry tells her to let their brother have a good time. Henry asks Della if she wants to go to the Sleepy Lagoon, as he has something to tell her, but then decides that they ought to do it later.
Suddenly, Rudy gets into a fight with Rafas, the leader of the Downey Gang, and Rafas pushes him onto the floor, yelling, "And what does it matter to you, male prostitute?" Henry stands up for Rudy, as Rafas pulls out a switchblade. A knife fight ensues, and Henry gets the upperhand, holding his knife to Rafas' throat.
Pachuco snaps his fingers and says sarcastically, "That's exactly what the play needs right now. Two more Mexicans killing each other." Henry wants to kill him, and shouts at the audience that he has to or Rafas will kill him. "That's exactly what they paid to see," says Pachuco, "Think about it." Pachuco then snaps his fingers again and everyone unfreezes. Henry lets Rafas go and the Downey Gang leaves. Bertha gives Henry a hard time for not killing Rafas.
Scene 8. El Dia de la Raza. In the present, the Members of the Press enter and announce that Columbus Day, 1942, is the eve of the Sleepy Lagoon Murder Trial. Alice and George enter, and we see Henry in a cell. George introduces Henry to Alice, who tells him she's a reporter for the Daily People's World and a key member of the committee that is fighting for the 38th Street boys.
Henry complains that his clean clothes, which were supposed to be delivered days earlier, have not arrived yet. George goes to investigate and Alice asks Henry some questions. She tells him that the regular press is saying that the Pachucos are fascist and are following orders from American Japanese from inside the relocation camps.
Henry is not amenable to Alice's questioning, and she tells him she wants to be his friend and understand him. When she asks him about the cross tattoo on his hand, he covers it up instinctively, and she tells him she spoke with his family. Alice also tells him that she knows that he has been imprisoned wrongfully, without evidence, many times. She tells him she knows he's an excellent mechanic, then asks him if he committed the Sleepy Lagoon Murder. He tells her, seriously, that he did not.
George comes back in, angry that Henry's clothes are being withheld. Alice tells Henry that she believes in his innocence, and that many people are on his side.
In this section, the play travels back in time and shows the week before, when the murder at Sleepy Lagoon happened. We are introduced to Henry's family: his mother, Dolores, his father, Enrique, and his sister, Lupe. We see Henry in a calm and supportive domestic life, and hear about his ambitions to join the Navy. The play experiments with time in a way that aligns the audience with Henry and his plight; we have already seen that he was arrested, and we suspect that it is a wrongful arrest. Now we are shown the actual events of what happened that night, which further confirm Henry's innocence.
When the play returns to the present, we are introduced to Alice Bloomfield, a young reporter with the spirit of an activist. She is committed not only to learning the truth of the case, but also exposing the racial inequality and context that has created the case. Of the white characters that have shown up in the play, she is the first to take an active interest in looking at racism and racial prejudice as it has affected the lives of the Chicano characters.
Another white character who is interested in working on behalf of the boys emerges in this section the play: George Shearer. The boys give him a hard time at first, convinced that he is a cop posing as their savior, but he eventually gets so frustrated with their skepticism that his passion convinces them that he really has been hired to help them. George has been tasked with working for the boys after a citizens' committee formed on their behalf, as there are many members of the community who believe the gang members have been wrongfully convicted.
George has a hard time convincing the gang members that they should trust him. At first, they mistrust him automatically because he is white, and suspect that he is a cop. However, when he reveals that he can speak Spanish, they have an easier time trusting him. In an impassioned monologue, he says, "The problem seems to be that I look like an Anglo to you. What if I were to tell you that I had Spanish blood in my veins? That my roots go back to Spain, just like yours? What if I'm an Arab? What if I'm a Jew? What difference does it make? The question is, will you let me help you?" In this monologue, George suggests that the boys shouldn't make snap judgments about him based on what they assume about his identity, and that they ought to trust him because he wants to help them.
Valdez breaks from the realism of the play in theatrical and exciting ways, primarily through the figure of El Pachuco, an allegorical and symbolic figure in his own right. For instance, in the knife fight between Henry and Rafas, Pachuco snaps his fingers and advises Henry not to kill Rafas, as that is precisely what the audience is used to seeing happen with Hispanic characters onstage. Henry yells at the audience, breaking the fourth wall, and tries to explain that if he doesn't kill Rafas, Rafas will kill him, but when Pachuco says, "That's exactly what they paid to see. Think about it," Henry decides not to. Pachuco functions as a kind of conscience in the play, a moral barometer, and a voice of reason.