Lord Varys comes to visit Ned in his chambers to tell him things he "must know." The spymaster says the king is doomed without Ned's help - just like Jon Arryn was. Varys says the previous Hand was poisoned with the Tears of Lys, possibly by Ser Hugh. When Ned asks why, the eunuch responds: "Because he started asking questions."
Later, Arya Stark chases cats as part of her training under Syrio Forel, and she stumbles across a massive dragon skull in the bowels of the castle. When she hears voices, she ducks and hides as Varys walks by with Magister Illyrio of Pentos, talking about how close Ned is getting to the truth. "We will be at war soon," Varys says, and Illyrio worries that Khal Drogo will miss the opportunity to put a Targaryen on the throne.
Later, Littlefinger and Varys cross paths in the throne room and banter pointedly, alluding to the leverage they hold over each other. Varys knows that Littlefinger has been helping the Starks, but Littlefinger has learned that Varys is collaborating with Magister Illyrio. Their conversation is interrupted by Renly, who tells them Robert is attending their council meeting.
Arya wanders her way out of the dungeons and finds that she's left the Red Keep entirely. When she comes to the front gate, she's barely able to convince the guards - who think she's a peasant boy - to let her inside the castle. Ned is angry that she disappeared, but when she tells him that she overheard two men talking about him in the dungeon, her account makes far too much sense. He receives even more bad news when Yoren of the Night's Watch arrives to tell him that Catelyn took Tyrion prisoner on the Kingsroad.
Ned is called to Robert's council meeting, where he learns that Ser Jorah Mormont has reported that Daenerys Targaryen is pregnant with a son. Robert wants the young woman assassinated, and everyone on the council agrees besides Ned. "Cut her throat and be done with it," Littlefinger advises. Ned can't stomach it, however, and resigns his position, walking out of the room as Robert rages behind him. "I'll have your head on a spike!"