Viola, disguised as Cesario, meets Olivia's clown, Feste. They joke about words and meanings, and Viola admires how clever he is while pretending to be foolish. Then she goes to speak with Olivia.

Olivia asks Cesario to come closer and speak privately. She says she does not want to hear more about Orsino's love. She also explains that she sent a ring after Cesario, even though she knows this may have seemed strange. She is worried about what Cesario might think of her.

Viola says she feels sorry for Olivia. Olivia hopes that pity may grow into love, but Viola says people can pity even those they dislike. Olivia then tells Cesario that she loves him. Viola is troubled. She promises that she will not give her heart to a woman. Olivia asks her to come again, hoping she may change her mind.

Meanwhile, Sir Andrew Aguecheek is upset because he has seen Olivia giving attention to Cesario. Sir Toby Belch and Fabian persuade him that Olivia is only trying to make him jealous. They urge him to challenge Cesario to a fight. Sir Andrew writes a challenge, but Sir Toby decides not to deliver the letter. He thinks it is too foolish to frighten Cesario. Instead, he will describe Sir Andrew as dangerous.

Maria comes to tell them about Malvolio. She has watched him obey the letter she left for him. He is wearing yellow stockings and crossed garters, and smiling strangely. The others go to see him.

Olivia has also noticed Malvolio's behavior. She asks him what is wrong. He talks about yellow stockings and crossed garters, as if she had asked for them. He also speaks as if she wants him to be proud and important. Olivia thinks he has lost his mind. She asks Maria to watch him and asks Sir Toby to look after him too.

Malvolio believes that Olivia's words and actions confirm the letter's promises. He thinks she wants him to be proud and to oppose her relatives. He does not know that the letter was a trick.

Sir Toby, Maria, and Fabian pretend to be worried about Malvolio's health. They speak gently, as if he is ill. Malvolio becomes angry and leaves. Sir Toby suggests putting him in a dark room. Olivia already believes he is mad, so they think they can continue the trick for a while.

Sir Andrew returns with his challenge. Sir Toby tells him that Cesario is a dangerous fighter. Sir Andrew becomes frightened and wants to avoid the fight. Sir Toby says he will try to persuade Cesario to let the matter drop.

Olivia gives Cesario a picture of herself and asks him to come again. She says she will give him anything he asks, except her love for Orsino. Viola asks for that love, but Olivia cannot give it.

Sir Toby warns Cesario that Sir Andrew is waiting to fight. He describes Sir Andrew as quick, skilled, and deadly. Viola says she has done nothing to offend him. Sir Toby insists that she must defend herself. Fabian stays with her while Sir Toby goes to speak with Sir Andrew.

Sir Toby tells Sir Andrew that Cesario is terrible. Sir Andrew wants to give up the quarrel. Sir Toby says he will try to arrange a peaceful end.

When the two meet, Sir Andrew says he will not hurt Cesario. Antonio suddenly steps in. He has followed Sebastian and mistaken Cesario for him. He offers to take responsibility for any offense Cesario may have caused.

Officers arrive and arrest Antonio. They know him from a sea fight against Orsino's ships. Antonio asks Cesario for money. Viola does not know him, but she offers to share what she has. Antonio is hurt. He says he once saved a young man and loved him like a brother. He believes Cesario is that young man, Sebastian.

Viola does not know what he is talking about. Antonio is taken away. Viola hears the name Sebastian and begins to hope that her brother may still be alive.

Sir Toby, Fabian, and Sir Andrew criticize Cesario for leaving Antonio in trouble. Sir Andrew wants to beat him. Sir Toby says he will not draw his sword. The quarrel has not ended, but no fight has taken place.