Cesario is on his way to meet with Olivia only to bump into Feste whom he recognizes as the fool who had sang for Orsino. A conversation ensues, and Feste proves to have such a sharp wit that Cesario can’t help but to admire Feste, who is, by and by, sent to inform Olivia of Cesario’s arrival. Anon, Cesario is welcomed by Sir Toby and Sir Andrew who tell him that he may go directly in to meet with Olivia. He is about to when Olivia herself appears. The rest are dismissed and Olivia and Cesario hold their conference. Again Cesario speaks highly of the Duke and his intentions for Olivia, and again Olivia rejects the offered love. Olivia then asks for Cesario’s name and, having been told, apologizes for the ring, for the confusion that it may have caused. She then assures Cesario that if she were to take a husband, then she would take someone considerably older and more mature than Cesario. Content, Cesario assures Olivia that he would not be returning to plead again on Orsino’s behalf and turns to leave only to be detained. It is then when Olivia openly declares her love for Cesario.
Sir Andrew, who has noted Olivia’s affection for Cesario, is dissuaded from going home by Fabian and Sir Toby. The half-wit that he is, Sir Andrew is led to believe that Olivia made a show of liking Cesario to inspire Sir Andrew’s spirit, that although Sir Andrew had failed to act on cue and put Cesario in his place, that it isn’t too late to impress Olivia by issuing Cesario a formal challenge this instant. Inspired, Sir Andrew sequesters himself to write his challenge.
Fabian wonders if the joke will go too far if Sir Toby actually delivers the challenge, but Sir Toby avows that he will, arguing that Sir Andrew is too much of a coward to actually follow through on the challenge. Anon, Maria appears and urges them to join her and observe Malvolio make a complete fool himself.
When Sebastian gives up trying to deter Antonio from following him, Antonio explains that his devotion is motivated by his concern for Sebastian’s safety as Sebastian could not possibly anticipate the dangers Illyria poses to the newcomer. Grateful, Sebastian thanks Antonio and suggests that since they are both in town that they should make the most of it and do some sightseeing. Antonio demurs, however, saying how that it would best for him to lay low on account of his exploits in a naval battle that has singled him out as a marked man to the Duke of Illyria. With that, Antonio hands Sebastian his purse--in case Sebastian would like to indulge in some shopping--and tells Sebastian that when his day is done to repair to the Elephant, an inn where Antonio will establish their lodgings.
Olivia has sent for Cesario. Melancholy, she summons for Malvolio, who is wont to be staid, to attend on her. Cross gartered and in yellow stockings, Malvolio appears, smiling most garishly. Maria warns Olivia that Malvolio may have lost his wits, and, by and by, what with his strange pronouncements in reference to the letter, not to mention his ridiculous attire, Olivia believes that the summer heat may have gotten to Malvolio and that he is indeed, as Maria claims, mad. She orders her servants, and in particular her uncle, to attend to Malvolio.
Delusioned, Malvolio thinks that Olivia has summoned her servants, and in particular her uncle Toby, to attend to him so that Malvolio might disparage those with whom he was either an equal or an inferior to, and thereby establish his new superior status. To that end, he haughtily shuns and dismisses Fabian, Maria, and Sir Toby who try gently to disilllusion him from his illusions.
When Malvolio haughtily walks away, Sir Toby argues that since Olivia has determined Malvolio to be mad, that it would warrant treating Malvolio as a madman and binding and sequestering him until the fun wears off, at which point Malvolio would be made aware of the joke. The plan is more or less agreed to when Sir Andrew emerges with his written challenge. Sir Toby reads it and Fabian praises it. Cesario, accompanied by Olivia, is spotted walking nearby. Sir Toby directs Sir Andrew to hide and wait and when Cesario has parted company with Olivia to then draw his sword and upbraid the youngster. As Andrew hides and waits, Toby tells Fabian of his real plan: Each duelist will be told of the other’s fighting abilities in such exaggerated terms that both will balk when actually made to oppose one another. As to the letter, it will not be delivered in case of legal liabilities.
And thus, with Fabian’s help, Sir Toby manages to bring Cesario and Sir Andrew, who have been made mutually and mortally afraid of one another, to oppose one another at sword point when Antonio intercedes on Cesario’s behalf. Officers arrive to break up the possible fight, however--officers who arrest Antonio in the name of Orsino the Duke of Illyria. Antonio, hoping to buy back his freedom, asks Cesario for his purse, the one he had given Sebastian before repairing to the Elephant earlier. Confused and yet grateful for Antonio’s intercession, Cesario offers half of what he has which isn’t much, causing Antonio to be incredulous at the lack of reciprocal good will. He rebukes Cesario, mentioning him by name, i.e. Sebastian, as he is led away by the officers.
While Cesario repairs to Orsino’s court, in a state of disbelief, wondering if her brother--Sebastian--is indeed alive, as per Antonio’s words, Fabian, Toby, and Andrew conclude that Cesario is a scurvy rascal and is deserving of a beating on account of how he deserted his friend, Antonio.