Ham, Peggotty's nephew who was present at David's birth, is waiting for them at a Yarmouth public-house and leads them to the hulk of an old ship drawn up on land; it has been renovated into a sort of "real home" and that is where the Peggotty family lives. Although everything has a strong odor of fish, the boat is clean, and David's room (in the stern of the barge) is the "most desirable bedroom ever seen.
David is introduced to Mr. Peggotty, a bachelor brother who is the head of the house. David is puzzled about the relationship of Ham and of Em'ly (a young girl who lives there and is a little younger than David); he learns from Peggotty that they are both orphan children of relatives who died at sea.
The next morning before breakfast, David and Em'ly play on the beach and Em'ly tells him about her fear of the sea because it has taken so many of her relatives. She runs out on a timber jutting from the side of the pier where the water is deepest and David becomes alarmed that she will fall in. He comments much later that he has never forgotten this episode, and he wonders if it might not have been better if she had drowned while she was young and innocent. They return from the beach with shells that they have collected, and they exchange an innocent kiss before going to eat. David feels certain that he is in love.
The holiday ends, and David and Peggotty return home by the same carrier's cart. David is sad at having to leave Yarmouth, but he looks forward to seeing his mother once more. He is not met by his mother, however; he is met by a strange servant, and for a minute David is afraid something has happened to his mother. Peggotty takes David to the kitchen and admits that she should have told him earlier what has happened — David's mother has remarried; David has a new "Pa." He is then led into the parlor to meet Mr. Murdstone.
In Chapter 4, Dickens focuses on David's unhappiness. David thinks of little Em'ly and cries himself to sleep. In the morning, Peggotty and David's mother come to his room, and his mother accuses Peggotty of prejudicing the boy against her and her new husband. Mr. Murdstone appears and cautions his wife about the need for "firmness" in handling David. He sends both women from the room, but not before scolding Peggotty for addressing her mistress by her former name. "She has taken my name," he says, "Will you remember that?" Mr. Murdstone says further that unless David's manner improves he will be whipped with a strap.
After dinner, a coach arrives; Miss Murdstone, the sister of David's stepfather, has come to stay with the family. She is as hard and as austere a person as her brother, and she promptly informs everyone that she doesn't like boys. She observes that David obviously needs training with his manners, then immediately preempts the household keys and assumes all authority for running the household affairs. By degrees, she and her brother begin to intimidate David's mother until she becomes virtually an outsider in her own home.
One morning when David reports for his lessons, Mr. Murdstone is already there — with a cane, which he "poised and switched in the air." When the lesson goes badly, David is paraded upstairs, and his stepfather beats him, but not before David is able to literally bite the hand that feeds him (and in this case, restrains him). David is confined to his room for five days like a prisoner, and he is allowed out only for morning exercises and evening prayers. On the fifth day, Peggotty steals up to the room and speaks to David through the keyhole, informing him that tomorrow he is to be sent to a school near London.
The next morning David is sent away to school in the familiar horse-drawn cart. His grieving mother first implores him to "pray to be better," and then she blurts out, "I forgive you, my dear boy. God bless you!"
The stay at Peggotty's home is one of the most idyllic experiences in David's life. The simple warmth of the poor family is in contrast to the coldness that David will encounter in his own home. Mr. Peggotty is a friendly man who sums himself up with his introductory phrase to David: "You'll find us rough, sir, but you'll find us ready." He is contrasted with Mrs. Gummidge, who lives there, and her often-repeated complaint: "I am a lone lorn creetur' and everythink goes contrairy with me." Dickens' characters invariably have one pet saying that, along with their names, indicates their personalities. Mrs. Gummidge later shows another side of her personality.
Note in Chapter 3 that Dickens foreshadows coming events when he says that it might have been "better for little Em'ly to have had the waters close above her head that morning . . ." This effect is overly melodramatic perhaps, but it is a common technique of Victorian novelists to sustain reader interest over the course of a long narrative.