Caliban, Stephano, and Trinculo drink together. Ariel is present but invisible to them. Already drunk (as they were at the end of act 2, scene 2), the three men want to continue drinking but realize that they might run out of wine. Stephano suggests that they turn to water if necessary, but only at the last minute. Caliban has assumed the role of Stephano's servant—to Stephano's delight—but Trinculo scorns this relationship. Thinking that the island has very few people on it, he reasons that, if the other inhabitants are as foolish as the three of them are, the government cannot keep operating.

Stephano proclaims his intention to become the ruler of the island and appoints Caliban his lieutenant or standard-bearer. Caliban (who is extremely drunk at this point) praises Stephano. Trinculo renews his attacks on the "ignorant monster" Caliban—who, in response, entreats his lord for support. Stephano threatens the "mutinous" Trinculo with hanging and chastises him, urging him to treat Caliban, his subject, with dignity. A grateful Caliban thanks his lord and requests a hearing. Stephano agrees and tells Caliban to kneel before him, which he does.

Caliban explains his current situation: how he is in servitude to the unjust tyrant Prospero, who usurped his rule over the island. The unseen Ariel then begins speaking in order to cause discord among them. Using Trinculo's voice, Ariel says, "Thou liest." Thus, Caliban and Stephano think Trinculo is speaking. Caliban, enraged, insists that he does not lie, and Stephano threatens to punch Trinculo's teeth in.

The astounded Trinculo rightly claims that he did not say anything. Caliban returns to his story, urging Stephano to help him get revenge against Prospero. Caliban suggests that Stephano should claim the island, and once Stephano is its ruler, Caliban will serve Stephano instead. With Stephano's assent, they begin plotting to kill Prospero. Ariel intervenes again as Trinculo, repeating the claim that Caliban is a liar. Stephano, still fooled, warns Trinculo and then finally beats him.

Resuming their plot, Caliban suggests that they catch Prospero while he sleeps. Assuming that the magician's power lies in his books, he suggests that they seize the books and states that they will then be able to kill Prospero easily. In addition, Caliban tells Stephano about Miranda, whom he puts forth as the future king's queen. This is enough of an enticement to finalize Stephano's resolve: he agrees to the plot to kill the sorcerer and make Miranda his queen. He then appoints Trinculo and Caliban as his viceroys. Stephano pulls Trinculo into the conspiracy with a handshake and an apology. Ariel rushes off to inform Prospero of their plan.

As they wait for Prospero to fall asleep, the joyful Caliban suggests they sing Stephano's song, but they have trouble with the tune. However, when Ariel returns and plays a tabor and a pipe, Stephano and Trinculo fearfully wonder at the music's source. Caliban tries to assuage their fears of an island that resounds with "sweet airs." As the music wafts away, the men follow it offstage.