From Cyprus, Montano, the governor of Cyprus, watches as a storm rages at sea. He states that he does not think the Turkish fleet could withstand the storm, and a moment later a gentleman enters with the news that Cassio has arrived, and that on his voyage to Cyprus, Cassio saw that the Turks lost so many ships in the storm that Cyprus need not fear them. Cassio soon arrives himself, and though glad of the defeat of the Turks, he worries that Othello might himself have been lost at sea.
In the early scenes of the play, Othello is completely in command of himself, and the idea that someone could manipulate him seems almost ludicrous. But Othello's self-possession is based on his knowledge that his military leadership is needed by the state. But the storm that destroys the Turks also means that Othello's military leadership, the source of his manhood, is no longer necessary.
The Venetian ship carrying Desdemona, Iago, Emilia (Iago's wife), and Roderigo is the next to arrive. As soon as they arrive, Desdemona asks after Othello. When she hears that Cassio and Othello's ships lost contact during the storm she worries—but just then Othello's ship is spotted arriving at Cyprus.
Desdemona again demonstrates her loyalty and love toward her husband.
As they wait for Othello to arrive, Iago and Desdemona banter. Iago portrays all women, whether beautiful, ugly, smart, or foolish, as generally deceptive and sex-starved. But he also says that a woman with perfect virtue would be boring. Desdemona defends women against him, though she's clearly amused by Iago.
Iago expounds the prejudices against women and female sexuality that he will later use to manipulate Othello. Given the comic tone of his banter with Desdemona, however, it's hard to tell how he "really" feels about anything.
Cassio, courteous as always, takes Desdemona's hand and speaks with her privately for a moment. Iago notices, and says that this little courtesy of Cassio taking Desdemona's hand will be enough of a web to "ensnare as great a fly as Cassio" (2.1.169) and strip Cassio of his position as lieutenant.
Iago, in his "director" role, seems to directly address the audience. He explains how he will use "reality," Cassio taking Desdemona's hand, to spin an illusion—that Cassio and Desdemona are having an affair.
Othello arrives, in triumph. He is overjoyed to see Desdemona, and says that he is so happy and content he could die now. She responds that, rather, their love and joy will only increase as they age. Othello then thanks the people of Cyprus for their hospitality. He asks Iago to oversee the unloading of his ship, and he, Desdemona, and all but Iago and Roderigo head to the castle to celebrate their victory over the Turks.
With the Turks defeated, the scene on Cyprus is domestic rather than military. Othello and Desdemona continue to act out their love for each other in front of all. Yet in commenting that he could happily die at this moment, Othello unwittingly adds a dark tone to the love he shares with Desdemona.
Iago tells Roderigo that Desdemona is bound to tire of Othello, and want instead someone younger, more handsome, and better-mannered. He says that it is obvious who this man will be—Cassio, whom he describes to Roderigo as a knave and posturer who is always looking out for his own advantage.
In his plotting, Iago lies to everyone, all the time. Here he gets Roderigo to dislike Cassio by making Roderigo jealous of Cassio's chances with Desdemona. Notice that Iago's description of Cassio is actually a good description of himself.
In fact, Iago says, Desdemona already loves Cassio, and he asks if Roderigo noticed them touching hands. Roderigo did, but says it was just courtesy. Iago convinces him otherwise, and further advises Roderigo to provoke Cassio into a fight with him that night. He says that the people of Cyprus will then demand that Cassio be replaced, and in the process remove an obstacle that separates Roderigo from Desdemona. Roderigo agrees to do it, and exits.
Iago continues to play on Roderigo's jealousy. Roderigo had in fact correctly interpreted the briefly touching hands of Desdemona and Cassio as just courtesy, but Iago is able to use Roderigo's jealousy to warp his understanding, to mistake appearance for reality.
Alone, Iago delivers his second soliloquy. He says that he thinks it likely that Cassio does indeed love Desdemona, and believable at least that she might love him. He says that he himself loves Desdemona, though mainly he just wants to sleep with her because he wants revenge on Othello for possibly sleeping with Emilia. If he's unable to sleep with Desdemona, though, he reasons, at least the confrontation he's engineered between Roderigo and Cassio will cause Othello to suspect Desdemona of infidelity and drive him mad.
Once again, Iago directly addresses the audience, laying out his plans to the audience and once again taking on the role of "director." In fact, nearly all of the rest of the action of Othello involves the character's "acting out" the "play" that Iago is "writing." Also note how clear it is to Iago that if Othello suspects he has been unable to control his wife that he would lose his sense of manhood and his mind.