Book Two opens in Europe, where Selden is in Monte Carlo with Carry Fisher and some other less prominent people who appeared at the Bellomont. Also arriving in Monte Carlo are the Dorsets (George and Bertha), Ned Silverton, and Lily, who have been cruising on a yacht called the Sabrina all over the Mediterranean. Lily is looking her best, and she has been associating with old European friends, including Lady Skiddaw and the Crown Princess of Macedonia, as well as Lord Hubert.
Selden, anxious about seeing Lily after seeing her with Gus Trenor, learns from Carry that Bertha Dorset brought Lily along on the voyage to keep her husband, George, distracted while Bertha pursues her affair with the young Ned Silverton. However, Bertha is becoming jealous of Lily's success with persons of nobility, which leaves her with torn between wanting to kick Lily off the yacht and find other ways to hide her affair or letting Lily stay and putting up with Lily's success. To make things more complicated, George is beginning to take a real interest in Lily.
Selden decides to get away from that scene and returns to Nice, which will become his home base. However, later on he goes with Ned to see a show on the bay in Monte Carlo. He decides to leave in order to wander around thinking, but as he walks around the streets he sees Bertha and Ned walking together. Selden goes to the club, where he meets up with Lord Hubert, but he now knows that Lily is being used as a tool to keep George Dorset occupied while Bertha and Ned spend time together.
The next day, we see Lily by herself on the Sabrina. She feels a separation from her financial worries back home, which livens her spirits, but she realizes that she is running very low on money. Later on, she meets up with Carry Fisher, who tells Lily that a rumor is starting to spread that Lily and George are having an affair with one another after being seen together at the train station. Although Lily and George were waiting for Bertha to show up, Carry says Lily will "pay for it." We learn later that the rumors were started by Bertha as an excuse to kick Lily off the Sabrina.
As she goes around town, Lily meets George, who tells her that Bertha missed all the trains the previous night and left the two of them waiting as a result. Even though he is somewhat dense, Dorset has an emotional breakdown, knowing that his wife is having an affair with Silverton. He decides to get Selden to help legally end his marriage. Although Lily decides to forgive Bertha out of friendly sympathy, Bertha later lies and says that she and Ned were actually at the train station first, and did not wait for Lily and George. Bertha tells Lily that she is angry that Lily and George were seen together in public because of the rumors it will undoubtedly spur (most of which were started by Bertha).
Later on, Lily shares an awkward dinner with the Dorsets, which arouses suspicion because Ned does not appear and George avoids Lily. That night, Selden goes looking for Lily to speak with her, and he finds instead Lord Hubert and Mrs. Bry, who invite him to attend a dinner with the Duchess. Knowing Lily will be present, Selden decides to go, and when he finds Lily there he tells her to leave the yacht because he worries that people will gossip too much about Lily and George.
At the dinner party, numerous dignitaries show up, much to the happiness of Mrs. Bry, who is trying to establish herself as a member of the elite society with the help of Carry Fisher. However, after the dinner, when Lily prepares to go back to the yacht, Bertha suddenly announces to everyone that Lily will not be returning to the yacht and promptly disappears. Although Lily tries to cover up her expulsion, most people assume that Bertha has kicked Lily out because Lily had an affair with George. Selden walks the devastated Lily to a cab and takes her to Jack Stepney's apartment, where Jack will let her stay for the night. Lily is torn, knowing that she has virtually nowhere to go.
The first few pages of Book Two remind us that one of the major themes of the novel is Lily's knack at botching her many opportunities to get married. She is a beautiful woman, which allows her to associate with many figures of royalty, and we find out that when she was 19 she nearly married an Italian prince. She lost her chance, though, when the Prince saw her flirting with someone else. During the course of the novel, Lily has blown her chances with both Percy Gryce (by spending time with Selden rather than him) and Simon Rosedale. Before the novel ends, she will also give up even more opportunities to marry Selden. Lily's indecision and inability to commit herself, as well as her incessant belief that she can "do better," is ultimately what accounts for her failure to marry. Because she is intent on marrying not for love but for society, she would have been a great success if she had simply married any man of wealth when she had the chance.
Wharton, in Chapter One, ominously describes Lily's position as on the "brink of a chasm," with reference to her social position. The language seems to imply that Lily can either fall into the chasm without hope of recovery, or she can move away from the border to safety. Wharton is still trying to indicate that Lily could go either way, toward success or doom. The reader should know that in the next chapters, Lily will fall very deep into the chasm, and though she tries, she will not be able to pull herself out. Still, Wharton gives us the moment when Lily is on the very brink of the chasm; this could be the point from which her fall from society really begins.
Selden is also going through an interesting crisis as Book Two begins. As he leaves Monte Carlo and returns to Nice, he asks himself, "What the deuce am I running away from?" indicating that he cannot decide whether he should return to Monte Carlo and face Lily, or stay away from her. The deeper issue, however, is one of Selden's position as an outsider. Selden has always been described as an outsider who takes an intellectual interest in the events and politics of society without actually involving himself in them. He recognizes, though, that his love for Lily is drawing him more and more into the social circle, a thought that doesn't appeal to him. Ultimately, Selden's problem is one of reason versus emotion, and he cannot decide which instinct to obey. He ends up choosing reason, pessimistically deciding that if he does not see Lily, he cannot fall in love with her. As Book Two progresses, he will ultimately change his mind, but not before it is too late.