Olivia, who sent a servant after the departing Cesario to persuade him to return, tries to figure out how to woo him to love her. Feeling suddenly melancholy, Olivia sends for Malvolio because she wants someone solemn and sad to help with her strategy.

But when Malvolio appears, he behaves very strangely. He wears crossed garters and yellow stockings, smiles foolishly, and continually quotes strange phrases that Olivia does not recognize. Malvolio, we quickly realize, is quoting passages from the letter that he believes Olivia wrote to him. He suddenly exclaims things like “Remember who commended thy yellow stockings . . . And wished to see thee cross-gartered” (III.iv.44–47). Olivia, of course, knows nothing about the letter and thinks Malvolio has gone mad. When the news arrives that Cesario has returned, she assigns Maria and Sir Toby to take care of Malvolio, and goes off to see Cesario.

Malvolio is convinced—in spite of Olivia’s apparent bewilderment—that he is correct in his surmises and that Olivia is really in love with him. But when Sir Toby, Fabian, and Maria come to see him, they pretend to be certain that he is possessed by the devil. Malvolio, remembering the letter’s advice that he speak scornfully to servants and to Sir Toby, sneers at them and stalks out. Delighted by the turn the events have taken, they decide together to lock Malvolio into a dark room—a frequent treatment for people thought to be possessed by devils or madmen. Sir Toby realizes that since Olivia already thinks Malvolio is crazy, he can do whatever he wants to the unfortunate steward.

Sir Andrew enters with a letter challenging the young Cesario to a duel. Sir Toby privately decides that he will not deliver the silly letter but, instead, will walk back and forth between Sir Andrew and Cesario. He will tell each that the other is fearsome and out for the other’s blood. That, he decides, should make for a very funny duel.

Cesario comes back out of the house, accompanied by Olivia, who insists that Cesario take a locket with her picture as a love token. She bids he come again the next day, and then goes back inside. Sir Toby approaches Cesario, delivering Sir Andrew’s challenge and telling him what a fierce fighter Sir Andrew is. Cesario says that he does not wish to fight and prepares to leave. Sir Toby then returns to Sir Andrew and tells his friend that Cesario is a tremendous swordsman, anxious for a fight. When Andrew and Cesario cross paths, though, Sir Toby tells each of them that the other has promised not to draw blood in the duel. Reluctantly, the two draw their swords and prepare for a fight.

Suddenly, Antonio enters. He sees Cesario and mistakes him for his beloved Sebastian, and tells Sir Andrew that he, Antonio, will fight Sir Andrew in Sebastian’s place. Several Illyrian officers burst onto the scene. They have recognized Antonio—a wanted man in Illyria—and arrest him. Antonio, realizing that he will need to pay a bail bond in order to free himself, asks Cesario, whom he still believes is Sebastian, to return his purse (which Antonio gives to Sebastian in Act III, scene iii). Viola, however, has no idea who Antonio is. Antonio thinks that Sebastian is betraying him by pretending not to know him, and he is heartbroken. Deeply shocked and hurt, he rebukes Sebastian. The officers, thinking Antonio is insane, take him away. Viola is left with a sudden feeling of hope: Antonio’s mention of someone named “Sebastian” gives her some hope that her own brother—whom she has thought dead—is in fact alive and nearby. Viola runs off to look for him, leaving Sir Andrew and Sir Toby very confused.

The plot speeds up in this scene, and the cases of mistaken identity and deception become increasingly complicated. First, we see the hilarious results of Maria’s deception, which bears fruit in Malvolio’s alleged madness. Because he thinks that he shares a secret understanding with Olivia, Malvolio expects her to understand the bizarre things he does and says. Olivia, of course, is bewildered by the change in her normally somber steward, and his apparently illogical responses to her questions make her assume, naturally enough, that he must be out of his mind. She interprets his quotations from the letter as simple insanity: “Why, this is very midsummer madness,” she says after listening to a string of them (III.iv.52). But Malvolio, cut off from reality, willfully ignores these signs that all may not be as he thinks. He fits Olivia’s words to his mistaken understanding of the situation. When she refers to him as “fellow,” for instance, he takes the term to mean that she now thinks more highly of him than she has before (III.iv.57). His earlier egotism and self-regard has become pure, self-centered delusion, in which everything that happens can be interpreted as being favorable to him. As he puts it, “[N]othing that can be can come between me and the full prospect of my hopes” (III.iv.74–75). Malvolio makes a simple mistake—he twists facts to suit his beliefs rather than adapting his beliefs to the facts.

At this point, we realize why Maria’s letter was such a work of genius: in ordering Malvolio to be rude to Sir Toby and the servants, she makes certain that Malvolio will refrain from explaining himself to anyone. Thus, Maria has orchestrated matters such that Malvolio’s behavior will be the justification for the others’ treatment of him as if he were possessed. Sir Toby, with mock-bravery, says that if “Legion himself possessed [Malvolio], yet I’ll speak to him” (III.iv.78–79). Later, Sir Toby and the servants decide to treat Malvolio “gently, gently,” a recommended manner of dealing with people thought to be possessed. Once Malvolio leaves, the three plot to “have him in a dark room and bound”—another common treatment for madmen (III.iv.121). As Sir Toby notes, Olivia already thinks that Malvolio is mad, so they can torture him until they grow tired of it. It is here that we begin to feel pity for Malvolio. His humiliation may be richly deserved, but there is a kind of overkill in Sir Toby and Maria’s decision to lock him away. He seems to be punished cruelly for what are, after all, minor sins, and our sense that Malvolio is being wronged only increases in Act IV.

Sir Toby’s trickery in frightening Cesario and Sir Andrew with fearsome tales about each other’s prowess sets the stage for yet another wrinkle in the web of deception. Viola, who has been in disguise throughout the play, is now mistaken for yet a third person—her own brother, Sebastian. Antonio’s mistake is made much more poignant by his badly timed arrest and his grief and anger at thinking that Sebastian has stolen his money and betrayed him. He tells Viola, who is disguised as Cesario but who he thinks is Sebastian, that her beautiful features conceal a wickedness of soul: “In nature there’s no blemish but the mind. / None can be called deformed but the unkind” (III.iv.331–332). His anguish here is touching—far more touching than the flowery grief of Olivia, say, or the lovesick posturings of Orsino. It moves us because we know that for Antonio there can be no happy endings. A comedy like Twelfth Night ends, inevitably, with marriages—but there is no one for Antonio to marry, since he loves only Sebastian.

Meanwhile, Antonio’s mistaken insistence that Sebastian knows him and owes him money causes his arresting officers to think that Antonio, in turn, is insane. The disguises, secret identities, and crossed lines of communication lead to humorous circumstances, but they also tinge the action with hints of insanity and tragedy. Antonio is arrested, and Malvolio is confined as a madman—and the audience begins to feel that things are going too far. In the world of Twelfth Night, disorder and the gentle madness of romantic infatuation are celebrated, but there is a limit to how much anarchy can dominate the stage before comedy gives way to tragedy. As in a tragedy, everything in Twelfth Night falls into disorder as the play moves toward the conclusion; because the play is a comedy, however, we know that matters will be put right in the end.