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Iago plays on Othello's insecurities about Desdemona, and gets Othello to believe, through insinuation, that there is something going on between Desdemona and Cassio. Othello seizes on this, and then Iago works at building up his suspicions. Soon, Othello begins to doubt his wife, as Iago lets his insinuations gain the force of an accusation against her. Othello begins to voice his insecurities when it comes to Desdemona, and himself as well.
Desdemona drops the handkerchief that Othello gave her on their honeymoon; Emilia knew that her husband had wanted it for something, so she doesn't feel too guilty about taking it. Emilia gives it to Iago, who decides to use the handkerchief for his own devices. Othello re-enters, and tells Iago that he now doubts his wife; Othello demands "ocular proof" of Desdemona's dishonesty, so Iago sets about making stories up about Cassio talking in his sleep, and says that Cassio has the handkerchief that Othello gave to Desdemona. Iago knows how important this handkerchief is to Othello; it was his first gift to Desdemona, and was given to him by his mother. Othello is incensed to hear that Desdemona would give away something so valuable, and is persuaded by Iago's insinuations and claims to believe that Desdemona is guilty. Othello then swears to have Cassio dead, and to be revenged upon Desdemona for the non-existent affair.