The first week of school passes, in which things seem unbearable for Jess. School is as boring and seemingly pointless as ever, but worse, Leslie continues to join the races at recess, and each day she wins. Enthusiasm for the races begins to die down as the boys' dissatisfaction and humiliation at being beaten by a girl grows. By the end of the week, it is understood that there will be no more races. Jess continues to avoid Leslie, unable to be around her without being reminded of his own shame and being irked by her inability to fit into the Lark Creek Elementary mold.
The one bright spot on the horizon is Miss Edmunds's weekly visit to the school. She comes on Friday, finally, and with her is a lift in Jess's spirits. During class, they sing "Free To Be You and Me," and Jess is transported. In the middle of the song, he suddenly realizes how silly he has been in avoiding Leslie, sensing intuitively that they could be great friends, and smiles across the room at her. Leslie correctly interprets his smile and sits beside him on the bus that afternoon. In their conversation, Jess learns a lot about Leslie. She comes from an affluent town with a good school district, much different from Jess's area, and that so far, she hates her new home. He learns that her parents moved to "reassess their value structure," meaning that "they decided they were too hooked on money and success, so they bought that old farm and they're going to farm it and think about what's important." Most daunting of all, is that Jess learns that Leslie's family is rich. In the poverty of the world he lives in, Jess can hardly understand this last fact, and in the end he simply vows to ignore it.
All these differences are perhaps summed up in their worst light in an incident that takes place at the school. One day in school, Miss Myers reads aloud an essay that Leslie wrote on scuba diving, an essay that hits Jess hard, for its vivid description of the underwater world tap into his own fears of the water. After the essay has been read, Miss Myers announces that there is to be a special on Jacques Cousteau on television that night, and asks the class to watch the special and write a one-page essay about it. Leslie reluctantly, but bravely, raises her hand and tells Miss Myers that she cannot do the assignment, because her family does not have a TV set. The class is shocked and disdainful, and makes fun of her at recess. Leslie avoids Jess as he tries to comfort her, and after school dashes to the back of the bus and sits in what Jess knows to be the seventh graders' private territory.
Jess runs to the back of the bus and tries to retrieve Leslie, but Janice Avery, the ultimate school bully, catches them there. Jess forces himself to stand up to her, making a crack about her weight, and then Jess and Leslie shoulder past Janice and make their way to their usual seats. Jess's defiance of Janice seems to have cheered Leslie up somewhat, perhaps helping her to realize that there is someone in the school who likes her and is willing to fight for her, and she suggests that they do something together that afternoon. May Belle tries to push in, but Leslie gives her a set of brand-new paper dolls that her grandmother had sent her to placate her. Jess and Leslie have the afternoon to themselves.
They spend the afternoon swinging on an old rope hanging from a tree near the creek. As they swing, Leslie suggests that they need a place just of their own, apart from the rest of the world and known only to them—a secret, magic land of which they would be the rulers. Jess is excited by the idea, so they cross the creek to the woods. They decide to build their "castle stronghold" just on the other side of the creek, which relieves Jess. Jess does not like the darker parts of the woods, where it was "almost like being underwater." Leslie names their secret land Terabithia.
Jess and Leslie's friendship continues to grow and deepen in the next couple of months, both in school and in Terabithia. They face the harassment of Janice Avery and the teasing of their schoolmates and Jess's sisters, who assume and insist that Jess and Leslie are boyfriend and girlfriend rather than just friends. Leslie even helps school to go by faster for Jess, relating to him all sorts of mischievous imaginings about the teacher. The only problem in their friendship is that, when they're not in Terabithia, they are not really comfortable spending time at either family's house. Leslie's parents intimidate jess, because of their education, money, and less parental relationship with Leslie. Jess's parents disapprove of his consuming friendship with "that girl who dresses funny," Ellie and Brenda tease them constantly, and May Belle continually tries to horn in on their time together. Terabithia is the only place they can escape to, and Jess feels himself to be a new person the second he's swung across the creek on the old rope. Near the end of the chapter, Jess gathers the nerve to bring Leslie to the deep pine forest he is slightly afraid of, and Leslie manages to put his fears to rest by assuring him that it is haunted by the spirits of beautiful things, that it is a sacred place that even the rulers of Terabithia must not frequent on light matters. Jess listens to the silence for a moment, and suddenly it seems very different than it had before.