After a month has passed, David notices the man with the wooden leg cleaning the school in preparation for the arrival of students. That evening, David is summoned to see Mr. Creakle. David is intimidated by the headmaster, who has a habitually angry expression and always talks in a whisper (the man with the wooden leg repeats most of what he says in a louder voice). A cross-examination ensues, with Mr. Creakle asking how David has behaved so far, warning him that he knows Mr. Murdstone, and describing himself as a "Tartar." As proof of this, Mr. Creakle warns David that he would disown his own wife and daughter (who are in the room) if they disobeyed him. As he leaves, David dares to ask to take the placard off, and Mr. Creakle lunges at him in answer.
Even more than Mr. Murdstone, Mr. Creakle reveals just how tyrannically a husband and father could be if he chose to abuse his authority; he appears to take great pleasure in terrorizing his wife and daughter, who have few (if any) places to turn for help. Given this, it's not surprising that Creakle proves to be such a sadistic headmaster: anyone who would behave so viciously to his own family certainly won't hold back in the more cutthroat world outside the home.
The next day, the head teacher, Mr. Sharp, returns. A student named Tommy Traddles arrives and tells David that Mr. Sharp's luxuriantly wavy hair is actually a wig. Traddles and David quickly strike up a friendship, with Traddles helping smooth the issue of the placard over with the other students when they arrive.
In addition to being David's first real friend, Traddles will eventually become a foil to David. Although the two characters end up in a similar place—happily married, with thriving careers—Traddles follows a much more straightforward path there, without the missteps and false starts that plague David.
A student named James Steerforth returns. The boys have been anticipating his arrival so they can present David to him: Steerforth is older, good-looking, and rich, and therefore the unofficial leader of the group. When Steerforth meets David, he tells David that he ought to give him his money for safekeeping, and then asks him whether he'd like to use some of it to buy a bottle of wine Steerforth has. In this way, he tricks David into buying not only the wine but also cakes, biscuits, and fruit.
David's first interaction with Steerforth establishes a pattern that will hold for the rest of their relationship. Although Steerforth isn't exactly cruel to David, the combination of his charm and David's impressionability is a bad mixture. David is so in awe of Steerforth that he allows himself to be taken advantage of and led into various questionable activities. Even setting Steerforth's frequently amoral behavior to one side, this is problematic, because it prevents David from learning to exercise his own will and judgment.
That evening, Steerforth lays all the food out on David's bed and the boys stay up feasting and gossiping—an episode David remembers as magical to the present day. Through their talk, David learns more about the school—for instance, that Mr. Creakle and Tungay (the man with the wooden leg) used to work together trading hops (an ingredient in beer) and view the school mostly as a moneymaking venture. Both are consequently cruel with the students, although Mr. Creakle never dares to beat Steerforth. Mr. Mell and Mr. Sharp, meanwhile, are badly paid, and the former is particularly poor, having grown up in poverty.
David's fond memories of his nights at Salem House are another example of the nostalgia that colors his descriptions of experiences he has had to outgrow. This section also continues to develop the novel's treatment of class-related issues: Creakle, for instance, is eager to stay in the good graces of the wealthy and upper-class Steerforths.
After the talk dies down and most of the boys have gone to bed, Steerforth reiterates that he will "take care of" David. He also asks whether David has a sister, since he imagines she would be a "pretty, timid, little, bright-eyed sort of girl." David says that he does not, and continues to think about Steerforth as he falls asleep—though not, he says, because he had any premonition of Steerforth's future.
Part of what makes David and Steerforth's relationship "problematic," from a Victorian perspective, is its homoerotic subtext. In this exchange, Steerforth is apparently romantically interested in a (hypothetical) female version of David. The passage also underscores the idea that the friendship stands between David and adult masculinity by reinforcing his more "feminine" (that is, passive) traits: Steerforth's description of David's "sister" as "timid" and innocent is transparently a description of David himself.