At Gloucester's court, Curran mentions to Edmund that there are rumors of imminent war between Cornwall and Albany. Curran also mentions that Cornwall and Regan will be arriving to stay at Gloucester's castle that very night. After Curan has exited, Edmund reflects that this development – both the coming war and the arrival of Cornwall – will help him in his schemes if he acts boldly and is just a bit lucky. He calls to Edgar to come out of his hiding spot.
Paralleling the exchange between Gloucester and Kent at the beginning of 1.1, Curan's rumors of war indicate the coming dissolution of the kingdom and the breakdown of order. But for Edmund, who was born outside the law and now seeks to create disorder everywhere, these developments are good news.
Edgar enters. Edmund pretends to be frightened for Edgar's safety. He tells Edgar that Gloucester has discovered his hiding spot, and that the Duke of Cornwall is also rushing to the castle out of anger with Edgar. He asks if Edgar has said anything publicly against Cornwall? Edgar denies doing any such thing, but just then they hear Gloucester approaching. Edmund apologizes, but says that to keep up good relations with Gloucester he must pretend to be fighting Edgar off. He tells Edgar to pretend to fight him as well. While shouting as if he and Edgar are fighting, he whispers to edgar that he should flee. Edgar does, and exits. Once Edgar is gone, Edmund wounds himself in the arm in order to make the fight seem more real and himself seem more heroic.
Edmund dupes Edgar as easily as he has mislead Gloucester. Through his trickery he makes Edgar look guilty and himself look like a hero, and turns on its head the usual emotional bond between father and son as well as the usual legal bond between father and legitimate son.
Gloucester enters. Seeing that Edgar has "escaped," he sends servants after him, then questions Edmund, who confirms that Edgar attempted to persuade him to murder their father and, then, when Edmund opposed "his unnatural purpose" (2.1.59), attacked Edmund. Enraged, Gloucester declares that, by the authority of Cornwall, who is supposed to arrive that night, he will put a price on Edgar's head. Gloucester further declares that Edgar is no longer his son ("I never got him" [2.1.90]), and that he will make the "loyal and natural" (2.1.98) Edmund heir to all his property.
Staging the entire encounter for the purpose of misleading Gloucester, Edmund has provided yet another instance of manipulating vision in order to produce blindness. Entirely misreading his two sons, Gloucester falls for it and uses his authority to reverse the usual legal order, preferring the illegitimate to the legitimate.
Just after Gloucester makes this declaration, Cornwall and Regan arrive. They have already heard rumors of Edgar's attempted murder of his father. Gloucester confirms to them that his "old heart is cracked" (1.2.106). Cornwall praises Edmund for having "shown [his] father/ a childlike office" (122-3) and takes him into his service; Edmund gratefully accepts.
Yet, despite his definitive declaration, Gloucester, like Lear in 1.1 and 1.4, is clearly deeply emotionally affected by losing his emotional bond to his legal son—particularly given his old age. Cornwall, meanwhile, praises just the sort of parental respect that neither he nor Regan are going to show to Lear.
Regan then explains to Gloucester why she and Cornwall have come. They have been informed, via letters from both her father and sister, of differences between them. They hoped to seek Gloucester's counsel as their "good old friend" [1.2.146] and thought, in any case, that it was best to handle the matter while not at home. Gloucester welcomes them and says he will be happy to advise.
Despite how badly shaken and heartbroken he is by the loss of Edgar, Gloucester smoothly fulfills his duty, performing his role as host. Although Goneril and Regan have criticized Lear for his senility (1.1), here Regan at least suggests that she respects Gloucester's potential wisdom.