Confusion reigns as Sebastian is now mistaken for Cesario when Feste insists Sebastian sent for him and Sebastian is certain he did not (Cesario obviously did).
Sir Andrew finds Sebastian and thinking it is Cesario from the earlier "fight" that did not happen, hits Sebastian. Sebastian unlike Cesario is not afraid to return the favor and a fight is only stopped by Sir Toby's intervention. Sir Andrew decides to have Sebastian punished by the law of Illyria despite the fact that he started the fight.
Sir Toby and Sebastian are just about to fight when Olivia screams for her uncle, Sir Toby to stop. Olivia now scolds Sir Toby, hoping Sebastian, whom she thinks is Cesario (Viola), will forgive her uncle and not be displeased with her.
Sebastian, amazed that this beautiful woman he does not know, loves him, replies to Olivia that he will be ruled by her and the two set off to marry immediately...
In Olivia's house, Malvolio in a darkened room is teased mercilessly by Feste who tries unsuccessfully to convince Malvolio that he is mad.
Sir Toby, fearing that his fight with Cesario (actually Sebastian) has put him on thin ice with Olivia, wants Feste's teasing of Malvolio to stop. Feste has other ideas but eventually lets Malvolio write a letter to Olivia proclaiming his sanity...