Isabella writes in circles and hints that James has made a huge mistake, that the whole Captain Tilney thing is a big misunderstanding, that the Captain is a jerk, and that people are spreading rumors.
She asks Catherine to speak to James on her behalf.
Catherine is appalled by what a shallow and artificial person Isabella is and realizes that she's a big liar.
Catherine fills the Tilneys in on the latest developments and they are relieved that Frederick won't be stuck marrying Isabella, though Henry hints that Isabella's reputation is likely destroyed now.
Catherine still can't figure out Frederick's motives and asks Henry if he was just behaving badly and likes getting into trouble. Henry concedes this point.
Henry notes that Catherine is warped by a principle of general integrity and Catherine is flattered and forgets about being mad at Isabella and Frederick.