Mercutio and Benvolio still haven't figured out where Romeo is.
It turns out that Tybalt has sent Romeo a message that goes something like this: "I'm going to beat you up with my sword."
Mercutio is convinced that lovelorn Romeo is in no condition to face Tybalt in a duel.
History Snack: Many Elizabethans believed that love (between a man and a woman that is) basically turned men into sissies. The same idea appears in plays like Henry IV Part 1, where Hotspur refuses to have sex with his wife before heading into battle because he doesn't want to be soft, so to speak.
Mercutio uses the opportunity to mock Tybalt, who takes himself and his sword fighting skills way too seriously.
Romeo finally shows up. Mercutio and Benvolio notice that he's dropped the depressed "Rosaline doesn't love me" act. He's back to his old energetic, joking self.
The fellas engage in one of their favorite past-times, talking trash and telling some of the dirtiest jokes in Western literature.
As planned, the Nurse shows up to meet with Romeo. She looks ridiculous, as nurses sometimes did back then, and Mercutio can't resist flirting with her, mocking her, and talking dirty to her. (When the Nurse questions him about the time of day, Mercutio manages to turn a description of a clock into a graphic portrayal of masturbation.)
In between all these antics, Romeo manages to take the Nurse aside and tell her that Juliet should find an excuse to come to Friar Laurence's church – where she will be married. [FYI: Romeo's keeping his wedding plans from everyone (except the Nurse and Juliet), including his best friends.]