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Dr. Horrible stalks Penny and Captain Hammer on their dates; Horrible sings of the misery of the human condition, and Penny sings of hope and the possibility of redemption ("My Eyes"). Penny and Horrible, known to her as Billy, begin to talk openly as friends.

On his blog, Horrible reveals that his Freeze Ray has been completed, and that he plans to use it the next day. The following post reveals that he has failed, as Hammer and the LAPD watch his blog, and they were ready for him. He then receives a phone call from Bad Horse and is reprimanded, saying that the only way to be inducted now is to commit an assassination ("Bad Horse Chorus (Reprise)"). Horrible is conflicted and can't decide on a victim, or even if he wants to commit a murder at all, even though the League will deny his application or even kill him, if he doesn't.

At the laundromat, Billy/Dr. Horrible chats with Penny over frozen yogurt about his problems ("Penny's Song"). As they grow closer, Penny mentions that Captain Hammer is planning to drop by. Billy/Dr. Horrible panics and tries to leave, only to run into Hammer as he walks in. They feign ignorance on recognizing each other, but when Penny leaves them alone, Hammer taunts Horrible about his crush on Penny, happy to be taking the thing that Dr. Horrible wants most. It becomes obvious that Hammer doesn't really care about Penny but just wants to sleep with her to spite Horrible. Horrible decides to kill Captain Hammer as his heinous crime for admission to Bad Horse's Evil League of Evil ("Brand New Day").
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