Enter Iago and Othello. Iago is playing mind games with Othello as usual, forcing him to imagine Desdemona and Cassio in bed together. Iago then brings up the lost handkerchief, saying if he'd given it to a woman, it would be her possession, and she'd be free to give it to anyone she pleased. Othello then asks whether her honor could be given as freely, too. He had forgotten about the handkerchief until Iago graciously reminded him.
Iago wheedles a bit more, now making the outright lie that Cassio claims to have slept with Desdemona...or something. Iago isn't totally clear if Cassio said "lie with her" or "lie on her," which is a pretty big difference. Either he slept with her or told a lie about her. Nice. Of course Othello takes the meaning Iago wants him to take. Othello gets so upset he starts mumbling and falls into a trance.
As Iago gloats over the effects of his wicked work, Cassio comes in and wonders what's going on with Othello. Iago explains that he's just having a fit—totally normal—in fact, the second one since yesterday. Cassio suggests that perhaps they should try to tend to Othello, but Iago thinks it best to let the man suffer. He tells Cassio to leave them for a minute and come back when Othello has left, so they can have a friendly chat.
Othello slowly comes out of his fit. Iago asks if his head still hurts, and Othello, still in a passion, interprets this to mean Iago is thinking any man's head would hurt if it were burdened by cuckold's horns. (Cuckolds are men who are led about by the horns by their wives. Othello, tricked by his own woman, feels he wears such horns.) Iago "comforts" Othello by saying lots of men are deceived by their women; it's like a club of whipped brothers. Othello then declares Iago to be very wise. All is lost.
Iago tells Othello to hide a little ways away so that he can overhear a conversation between Iago and Cassio, one where Cassio will clearly incriminate himself by talking loosely about Desdemona. Othello thinks this is a wonderful idea, and says he'll listen with patient and bloody thoughts. (Apparently, finding objective proof has gone out the window.)
Iago then announces his plan (to us, not Othello): he'll talk in veiled terms to Cassio about Bianca (the prostitute), whom Cassio takes very lightly. Othello, hearing the conversation, is bound to think Cassio is making light of his wife, Desdemona. Iago underhandedly will have given Othello the shadow of proof. Mwah-hah-hah, yet again.
When Cassio comes back, Iago brings up Bianca, in all her pathetic ardor. Cassio, of course, laughs about how much the woman loves him, how desperate she is, and how easily beguiled she has been by his false intentions of marriage. (This conversation is overheard by Othello, who apparently missed the key word "Bianca." Othello indeed thinks they are talking about his wife.)
It must be Iago's lucky day, because Bianca herself comes in and throws Desdemona's handkerchief in Cassio's face. Cassio calls her a "fitchew," which is a polecat, known for being lusty and smelly.
Bianca is furious that Cassio has given her something that obviously came from another woman, a woman who is indeed a "hobby-horse" (another useful slang term for an Elizabethan harlot). Bianca walks out in a huff and Cassio follows her.
Othello is completely convinced by this little scene, and furious that Desdemona would give Cassio their special handkerchief, especially since his mother's dying bequest ended up in the hands of a common prostitute. He rages for a bit, and finally gets to talk of action.
Othello first threatens to chop Desdemona up into little bits. Then, he asks Iago to get him some poison, so he might kill her that very night. He won't chat with her about her offenses, as he's sure she'd be able to talk him out of her murder.
Othello thinks this murder plan is most just. Iago reveals he still intends to take out Cassio. He assures Othello he'll report back before midnight.
The conversation is interrupted by Lodovico, kinsman of Brabantio (Desdemona's father, remember?). Lodovico brings news from the Duke in Venice: Othello has been called back to the city, and Cassio is to replace him as command in Cyprus. While Othello reads the letter from the Duke, Lodovico talks with Desdemona (who showed up in the meantime) and asks her how Cassio is doing.
Desdemona explains how Cassio and Othello had a falling out, and declares she hopes they can work it out "for the love I bear to Cassio" (4.1.231), which is not a good move given the fact that Othello was just thinking about Cassio having sex with his wife. Othello, overhearing Desdemona's loving comments toward Cassio, gets enraged and hits Desdemona.
Desdemona can't figure out why her husband would strike her—and in public no less—when she's done nothing to deserve it. Lodovico insists Othello make amends with the poor girl, as she's weeping. Othello says she can cry crocodile tears (full of falsehood) and he won't care, as she changes faces so easily.
Othello then declares he'll head back to Venice, and Cassio shall have his post (leaving out that he will be too dead to fill it). Desdemona leaves, shell-shocked, and Othello stalks out, muttering "goats and monkeys!" (4.1.265).
Lodovico is shocked that Othello would injure his wife and behave so boorishly in public. He wonders whether Othello has been put into a passion by the Duke's letters, but Iago suggests this poor form is Othello's status quo. Iago demurs on giving details about Othello's failings, saying, with seeming humility, that it's not up to him to reveal the evils he's seen. This leaves Lodovico free to imagine worse evils.