The disguised Duke tries to comfort Claudio before the execution by promoting the baseness of life -- "Thou'rt by no means valiant, / For thou dost fear the soft and tender fork / Of a poor worm" (III.i.15-17) -- and the joy of death -- "Thy best of rest is sleep" (III.i.17). When Isabella arrives for her visit with her brother, the Duke asks the Provost to be allowed to eavesdrop on the two.
Isabella informs Claudio of her failure with Angelo: Claudio must die. Tactlessly, she says there is one remedy, but that he's too noble to consider it. She reports Angelo's sleazy offer. "Few scenes in Shakespeare better demonstrate what Keats called his 'negative capability', his ability to enter into diametrically opposed states of mind, than that in which Isabella tells Claudio of Angelo's proposal and her reaction to it" (Wells 229). With her mention of the dead father's voice (III.i.84f), "Isabella could be said here to be using the return to the role of the obedient daughter as a way to avoid certain crises of adulthood" (Garber 573).
Claudio's first reaction is an immediate agreement with Isabella's horror, but gradually, in a Hamlet-like moment, he considers death and comes to think she should consider the bargain. Claudio's processing of the dilemma "sounds a great deal like the various descriptions of the sufferings of the damned in hell in Dante's Divine Comedy" (Asimov 642). The elder Ogburns speculate that Oxford may have been reading Dante in the Tower in 1581, accounting for echoes here if he wrote the play at this time (Ogburn and Ogburn 390), particularly of Paolo and Francesca (Ogburn and Ogburn 340). They note too that there's less an emphasis on "banishment" in this play than others, suggesting a composition time prior to Oxford's years away from the court (Ogburn and Ogburn 327-328).
At this point, Isabella becomes enraged with Claudio and curses him "in terms that may, according to the tone in which they are delivered, seem anything from the hysterical outburst of a young girl who is frightened of the idea of sex as Claudio is of death, to the callous condemnation of a self-centred prig" (Wells 230). "Her protest of chastity against all assaults has a strong psychosexual tone, one that a modern world would classify as a kind of sadomasochism" (Garber 573). She leaves.
"She might not give in to Claudio, but she might at least sympathize with his fear od death and forgive him is human weakness" (Asimov 642). "She has herself dropped from saintliness to beastliness -- and projects her own beastliness on her brother.... Drunk with self-righteousness," she speaks in a mode of "religion turned infernal. And it is the worse because of her allusion in her scene with Angelo, to Christ's atonement" (Goddard, II 56). Garber notices a pattern in the play:
Claudio's dungeon is an enclosed space, as is Isabella's nunnery, and the Duke's monastery, and Mariana's 'moated grange,' a farmhouse surrounded by a moat that serves in place of a wall, like the enclosed and walled garden, the hortus conclusus, of medieval and biblical tradition. Each is imaginatively a sign of a set of other enclosures: virginity and chastity; brotherhood and obedience; even death, as Claudio makes clear when he imagines death as a physical confinement.... (Garber 568)
The Duke, having overheard all this, tells Claudio that Angelo "had never the purpose to corrupt her" (III.i.161-162) and that the proposition was merely a test of his sister's virtue; the execution is very much a done deal. The Duke then dismisses the Provost to speak privately with Isabella, telling her of a plan that could save Claudio: Angelo was once betrothed to a Mariana whom he deserted when a shipwreck claimed the life of her brother Frederick and her dowry, at which point Angelo rejected her and spread word that she was of questionable character. Mariana is still devoted to Angelo, so Isabella should tell him that she'll agree to go through with the deal. "The maid I will frame, and make fit for his attempt" (III.i.255-256). In other words, Mariana might be willing to pretend to be Isabella's body: it's the old "bed trick" -- seen also in All's Well That Ends Well, another "problem play," and connected to de Vere (Clark 458; Ogburn and Ogburn 78-79, 334; Anderson 147, 341; Farina 37). Angelo is detached from his own first marriage then (Anderson 342).
In a scene reminiscent of the last moments of Henry IV, Part 2, we get a police round-up of the interesting lowlife characters. Elbow brings Pompey to prison and the Duke preaches at him, trying to shame him about making a living by whoremongering. The reference to "fox" and "furred gown" may indicate Burghley (III.ii.6-11) (Ogburn and Ogburn 333). Pompey asks Lucio for help but Lucio seems to enjoy others' troubles and he is mercilessly exuberant here. So Pompey receives from him further condemnation and is taken away. The 50-year-old Oxford knew what it was to be "calumniated" and the reference to being "helmed" (III.ii.102f) refers to the helmeted Pallas Athena, patron of the theater (Ogburn and Ogburn 342).
The disguised Duke engages Lucio in some discussion, obviously taken aback at Lucio's attitude (III.ii.113). Talk turns to the Duke, and Lucio is ready with insinuation, irresponsible gossip, and slander. The Duke suggests that Lucio is envious of the Duke: "Let him be but testimonied in his own bringings-forth, and he shall appear to the envious a scholar, a statesman, and a soldier" (III.ii.144-146). He dares Lucio to repeat these remarks when the Duke returns. Lucio leaves with more insults about the Duke, and the Duke wonders "What king so strong / Can tie the gall up in the slanderous tongue?" (III.ii.187-188).
Escalus brings Mistress Overdone to prison, and she says Lucio was her accuser, so she in turn accuses him of impregnating one of the whores and of breach of promise. She is taken away. The Duke tells Escalus he is a friar on a mission of secret church matters and gets to hear Escalus make admiring remarks about the Duke. They note Claudio's frame of mind, and, when Escalus departs, the Duke soliloquizes about falseness in an awkwardly inserted bit of quadrametrical doggerel (suspected of not being Shakespeare's).