Iago and Roderigo wait in a darkened street for Cassio to come. Iago has given Roderigo a sword. He tries to slip off in the darkness, so as to NOT help with the murder, and Roderigo asks him to stay near, in case he needs any help killing Cassio. Despite the plea, Iago gets away, and Roderigo is left mostly alone and noting to himself that he doesn't really have any ill will towards Cassio. Still, Iago's made a convincing enough argument that the man must die.
Iago explains his devious plot (again, to us, not to Roderigo) in the cover of the shadows: If Roderigo lives, he'll demand all the jewels and gifts he gave to Iago, intended for Desdemona. (Of course, these were never delivered.) If Cassio lives, his goodness will only remind everyone that, by contrast, Iago is really evil. Also, Cassio is the only one (besides Desdemona) who has the power to clear up what's really going on to Othello. In short, Iago will be glad if either or both men die (meaning Roderigo and/or Cassio).
Cassio then enters the street and Roderigo, hidden by darkness, tries to stab him. Cassio avoids the thrust, and wounds him back in self-defense. But then Iago arrives unseen and stabs Cassio in the leg.
Cassio cries out for help from whatever dark alley they all happen to be in. Othello, apparently nearby in his own dark alley, hears the pitiful pleas. Thinking Iago has done away, as he promised, with Cassio, Othello is now full of the piss and vinegar required to go and murder his innocent, faithful beloved. But first, he makes a rousing speech about lust and blood and all that grave stuff. Then he exits, presumably to kill Desdemona.
Lodovico and Gratiano, two Venetian gentlemen, come in when they hear Cassio screaming in the dark. Afraid this may be a trap, they hesitate, leaving Iago some time to enter with a light, the picture of confused innocence. Iago makes a big show of recognizing Cassio as a lieutenant and then vows to seek around in the dark for Cassio's assailant. Of course, Iago discovers Roderigo, and pretends not to know who he is. Then he conveniently and mortally stabs him.
Lodovico and Gratiano finally have their wits about them when Bianca enters, in hysterics to find her Cassio wounded in the leg. Iago tries to blame the whole messy situation on the poor strumpet, and then pretends to discover the man no one saw him stab.
Iago feigns surprise at the fact that Cassio's assailant was none other than Roderigo, who he declares to be his great friend. As they all tend to the wounded Cassio, Iago asks Cassio if there was some beef with Roderigo. Cassio says he doesn't even know the guy, and Iago quickly has the two Venetian gentlemen turn their eyes towards Bianca, who Iago suggests is somehow involved in this whole sordid matter.
Emilia comes in, and Iago sums up a version of the story through his lying teeth: Roderigo, who is now dead, joined with some other fellows, who are now escaped, to assault Cassio, who is now wounded. Iago, who is now telling the story, is still lying, so everything's fairly status quo.
Iago then instructs Emilia to inform Othello and Desdemona of all of these very surprising events. Left alone, Iago comments that this night will make him or break him. As it's already broken Roderigo, Cassio, Othello, and Desdemona, take a guess where the odds are stacked.