This episode introduces the a new part of the Avatar universe: the spirit world, something I find is a wonderful addition to the Avatar world. Spirits and ghosts are an integral part of Chinese and Japanese mythology, and I'm glad it's also present in the series, what with almost everything else based on these mythologies.
The execution of this concept is reasonable: the Avatar, the big balance bringer, also has to bring balance between the two worlds, and acts as a "bridge-guy". Only Aang doesn't know what to do, so he agrees to try to help the village and just improvises.
Probably the best part of the episode is Hei-bai's first appearance. When he first phases into existence and then starts rushing around the town, it brought back memories from Miyazaki's 'Spirited Away'. Good stuff.
Just as a side note, I love how the show uses real Chinese not only in writing, but also often in naming, such as in the case of Hei-bai's name (literally black-white). Since I'm half-Chinese, that's always a plus.
A quick cut over to Zuko and Iroh. This episode contains a good amount of character revelation for both. Iroh now has the nickname "The Dragon of the West", who has lain siege to the great city of Ba Sing Se. And he's still a capable and cunning warrior. Zuko, on the other hand, show that his care (maybe even love) for his uncle is greater than his goal to catch the Avatar.
Back to the gang, Hei-bai disappears with Sokka, and Aang ends up in the spirit world. At this point, however, it's just Aang's spirit walking around the mortal world, we don't actually get to see the place where spirits reside. Nevertheless, there are other spirits present. To me, the scene in which Roku's animal guide first appears makes it clear that the show is indeed aimed at a western audience, because the first impression given of the dragon is that it is dangerous and evil, and not the friendly spirit (similar to Christian angels) that they truly are in Chinese mythology. Even though the scare-effect was lost on me, it did not mar the episode in any way.
Eventually, Aang pacifies Hei-bai and saves the day, but finds out that he's on a tight deadline to talk to the one person who can clear up all the Avatar-related confusion. It's an appropriate cliffhanger for a two-parter.
This episode is great, and includes some stunning artwork. The one thing putting a minus symbol after the A grade is the beginning, where the wonderfully romantic mood set up by Katara is utterly destroyed in the blink of an eye by Aang. That, and maybe Katara's almost constant (and unfitting) melancholy expressions.