Griffin finishes a very satisfactory ghost story, concerning a child who sees some terrifying apparition. The Narrator notices that Douglas has something to say.
Two days later, Douglas brings up Griffin's story again; he wonders aloud if the terror of the story would be increased if it involved two children instead of one.
Douglas cranks up the tension, telling his listeners (and readers) that the story he will tell has never been heard before – however, he can't tell it just yet.
Apparently, the story exists only in an original manuscript, which he keeps in his office in town. It was written by a woman who was once the governess of Douglas's sister; we get the feeling that he was perhaps in love with her (or something) a long time ago. She's been dead for the past twenty years.
The guests agree to reconvene to hear Douglas's story, once the manuscript arrives.
The manuscript jumps right in the midst of the tale, so Douglas gives some background info: the woman in question (we'll call her the Governess), who was the daughter of a poor but good family, answers an employment ad in the newspaper, and finds herself at an interview with a handsome, wealthy, and generally rather dashing gentleman. The Governess is quite taken by her potential employer (who wouldn't be?).
The gentleman, who lives in the city, has two young children in his care at his country home at Bly – they're his niece and nephew, who were left to him when their parents died in India. He feels bad for the kids, but doesn't exactly know what to do with them.
The job in question sounds like a pretty good deal; she would simply have to look after the little girl, Flora, and the boy, Miles, during his school breaks. Mrs. Grose, a faithful family servant, acts as housekeeper and temporary nanny to the kids at Bly.
Alarmingly, we hear that the previous governess died – though we don't know how.
Douglas takes a brief break from his story to converse with the Narrator; they have a little back and forth about the Governess's motives in taking the job.
Upon seeing her potential employer a second time, the Governess takes his offer, despite the fact that many previous applicants rejected it. The reason for this is the gentleman's rather odd final condition: he insists that once the young lady takes the job, she never contact him again, and that she should completely take over the children and all of their matters. She agrees, and feels like she's already had some kind of reward.
After this background info, Douglas begins to read the manuscript – it's untitled, though the narrator snidely remarks that he has thought of a title (and it's the one we find on the cover of the book).