Christopher Sly awakes and is confused when servants address him as a lord, offering him fancy food and drink. The Lord is dressed as a lowly attendant and says that it is a pity Sly has gone mad. Sly is confused, and insists that he is Christopher Sly.
Christopher Sly is confused by his apparently new identity, but especially by his changed social class. Not only is Sly made into a nobleman, but the Lord is also dressed as a servant, demonstrating how theatrical games often invert social hierarchies.
The Lord tells Sly, "O noble lord, bethink thee of thy birth," (Induction 2.30) and catalogues all the luxuries that Sly has at his disposal: servants, caged nightingales, luxurious furniture, horses, hawks, and hounds for hunting. The Lord again tells him, "Thou art a lord, and nothing but a lord," (Induction 2.61) mentioning his beautiful wife.
Sly begins to question his own identity and finally agrees that he is indeed a wealthy lord. He asks to see his wife. The servants tell him that he has been mad for fifteen years. The Lord's page enters, dressed as a woman. Sly is convinced that the page is his wife and asks her to come to bed. The page declines, saying, "For your physicians have expressly charged, / In peril to incur your former malady, / That I should absent me from your bed," (Induction 2.122-124).
Sly is totally convinced by the page's costume, again showing how important performance is in establishing gender roles. The page's costume also comically mirrors the practice of Shakespeare's own actors: in Shakespeare's time, female parts were played by young male actors in female costumes.
A messenger enters, announcing that the group of players the Lord earlier hired is ready to perform. The messenger says that Sly's doctor thinks it will be good for him to see a play. Sly asks the page to sit next to him and watch the play.
The group of traveling players put on a play within a play. This makes the characters' "real" identities even more ambiguous. For example, we could regard "Cambio", later in the play, as really Lucentio, or as really a traveling player acting as Lucentio, or as Shakespeare's actor portraying a player acting as Lucentio.