Ah, King's Landing. This place is full of intrigue and sabotage, but it's also practically the only place in the series that looks comfortable. Well, I guess Winterfell has those awesome beds covered in furs. Anyway. Tyrion is still strolling around whistling cheerfully, because he knows when he's in a good position. And what could possibly go wrong with someone who's the Hand of the King? Well, when he goes into his rooms, he finds Varys the Evil Eunuch chatting away with Shae, the prostitute who Tyrion brought back from the Lannister encampment. Shae is supposed to be hiding, and hanging out with Varys is kind of the opposite of that. Varys acts like there's nothing at all weird about this and claims to be worry about Tyrion's head wound. Remember that time he was in a battle last season? I presume this is to show how much Varys knows about Tyrion's activities. Varys also pretends to believe Shae's story about how she met Tyrion while working in the Lannister kitchens. Then there's some badinage about her "fish pie." It's very ribald, by which I mean that it's exactly as funny as the allegedly dirty jokes in Shakespeare. Varys promises not to tell Tywin (Tyrion's father, the head of the Lannisters, and the guy who told Tyrion not to bring his whore to court -- honestly, it would help me out a lot if you'd remember some of this from episode to episode) that Shae is there. Because they're all such good friends. And Varys is always nice to his good friends. Anyway, it's time for a meeting of the Small Council. Before Varys can get out the door, Tyrion tells him he doesn't like threats. And unlike Ned Stark, he's not a man of honor. Going into specifics, he adds, "Threaten me again and I'll have you thrown into the sea." Varys is unimpressed, and is also willing to traffic in metaphor: "The big fish eat the little fish and I keep on paddling." With their positions established, off they go.
At the small council, Cersei Lannister reads out Robb's offer of peace from last episode. She's running the meeting as Queen Regent, because, I guess, Joffrey's too busy deciding what kind of shag carpet he wants in the throne room. Then she tears it up the offer because she doesn't like any part of it, especially the part where the North declares itself not a part of the Seven Kingdoms. Tyrion suggests giving them Ned's bones, at least. Cersei largely ignores this and wants the envoy (a random Lannister cousin; if we've been told his name, I honestly don't care) to tell Jaime he's not been forgotten. Maybe not by her, but I don't see him in this episode. If he wanted to get a lot of screen time, he should have been taken captive someplace interestingly scenic like Tyrion was.