When doing dialogue, basically there is a new paragraph if a different character speaks or acts. For example: "I don't believe it," Joe said. I rolled my eyes. Joe continued, "He would never do that." The question is what if a first person narrator isn't speaking or acting but interpreting (or failing to do so?) Is it this: "It was Joe," I said. He stood there for a moment, his mouth open. I don't know what that meant. "That's impossible," he replied. or: "It was Joe," I said. He stood there a moment, his mouth open. I don't know what that meant. "That's impossible," he replied. I think it is the second, but that seems to excessively break up the flow.
The paragraph should only contain speech and actions by one character. You CAN get away with a small action by another character, but generally, whenever you shift focus away from the speaker, you should start a new paragraph. I removed the reaction comment. It adds nothing to the scene, and shifting focus at that moment made the scene too dizzying. I also changed replied to said, because the other guy was not answering a question. I called the other guy Martin, because the pronoun was a bit confusing in the given context.
In a vacuum I agree the reaction isn't needed, but the context is a first person narrator is actually really bad a reading people and that isn't the kind of thing she's likely to just come out and say. If she did just say it that would telling and not showing. I'm trying to build a set of interactions where what happens is described and the reader can fairly easily interpret the meaning but it remains a mystery to the narrator who proceeds to respond, act or react with out understanding the meaning. Without establishing a few times that reading people is outside her skill set she can come off as inconsistently naive or mean.
Provided it's clear, rules can be tweaked. That sounds better to my ears. Without 'I didn't know what that meant', I would have put 'Martin stood there ...' with his dialogue and omitted the second said.
I agree w/ you Lost. I think Cog is right except I don't think you need the 'he said' when Martin speaks.
