On a street in Venice, Italy, Roderigo, a nobleman, and Iago are in the middle of an argument. Roderigo has paid Iago a lot of money to help him win the hand of Desdemona. Yet he has just learned that Desdemona has eloped with Othello, the Moorish (North African) general under whom Iago serves.
Roderigo's primary reason for hating Othello is not racial prejudice, but rather jealousy that Othello has won Desdemona. That Iago has not managed to help Roderigo despite being paid hints at his duplicity.
Iago assures Roderigo that he hates Othello, and explains that Othello recently passed him over for a promotion to lieutenant despite the fact that he was Othello's ancient (standard bearer) and had the recommendations of three leading men of Venice. Instead, Othello promoted Michael Cassio, a man who in Iago's estimation is just a "spinster" (1.1.23) military theorist with no practical experience in fighting or leading men.
Iago has his own jealous motives for hating Othello. When he calls Cassio a "spinster," Iago is questioning Cassio's manhood, while also implying that just as real men know how to fight, real women know how to have sex. A spinster is an old, unmarried woman who has no experience of sex, just as the military theorist Cassio has no experience of battle.
Iago then adds that while he currently pretends to serve Othello, he is in fact just looking out for his own self-interest: "In following him I but follow myself [...] I am not what I am" (1.1.57; 64).
Iago here reveals his capacity to hide his feelings and motives so that his actions don't reveal them.
Iago and Roderigo go to the house of Brabantio, a senator and Desdemona's father. They shout from the street that Brabantio has been robbed. Brabantio comes to the window, but at first doesn't believe them because he recognizes Roderigo, whom he has recently told to stop hanging around his house and pursuing Desdemona. But then Iago, who doesn't give his name and whom Brabantio doesn't recognize, graphically describes Othello and Desdemona having sex—he says that "an old black ram is tupping your white ewe" (1.1.88-89), calling Othello a "Barbary horse" (1.1.110), and adds that "your daughter and the Moor are making the beast with two backs"(1.1.118).
Brabantio thinks little of Roderigo. Iago, however, rallies the white Brabantio on their side by using prejudice as a tool, describing Othello as an animal ("black ram") and sex with Desdoma as bestial. Iago also makes use of the fact that Brabantio will feel his manly honor challenged by his daughter's having sex. Notice that Desdemona is also described in animal terms. In her case, the comparison is meant to evoke purity, but it also indicates that the men do not think of her as an equal human being.
Brabantio goes to search his house for his daughter, worried because he has had a "dream" (1.1.140) anticipating these events. Iago takes the chance to leave in order to keep his plot against Othello secret.
The language of "dreams" plays into the theme of appearance vs. reality. As does Iago's slipping away without giving away his identity, so he can continue to plot against Othello.
Brabantio emerges from his house without finding Desdemona. Furious, lamenting his life as wasted, he says that his daughter has been stolen by magic and that he wishes she had married Roderigo. They set off to raise an armed search party and confront Othello.
Brabantio feels his manhood ruined by his daughter's deception, and insists that Othello could only have unmanned him in this way by twisting reality through some kind of sorcery. His change of heart regarding Roderigo as the lesser of two evils reveals his prejudice against Othello.