Story within a Story... Help!

Do you mean tell Amy's life story or just what she's observed? If it's just what your mc has observed, I'd just tell it in the process of a time when your mc is spying on Amy. "She was doing this, which reminded me of the time I saw her..." Something like that.

If it's Amy's life story, would that be something your mc would actually know? If so, maybe something your mc observes would again trigger a thought that would bring the story up. Just my thoughts. Hope it helps a bit, anyway!

In that case I would just tell it. I think your readers will understand that your mc is not actually hearing the conversation, especially if you set up that she can't actually hear anything over there. If you're not comfortable just jumping right into it, one simple "she imagined Amy said..." or something similar that would fit better into your story would most likely work. Hope that helps!

So your MC is watching but can never be quite sure of what's happening beyond observed actions? Maybe a stream of consciousness approach might get you something, e.g. and just for fun's sake,

What's the stupid cow up to now? She already cleaned the windows this morning. She is, she's doing it again. One of us is crazy and it isn't me. Fascinating to watch, though. The way she does things. The wax on, wax off approach. No variation allowed. Precision housekeeping. Not one speck of dust escapes alive. What's she doing? The phone's ringing. She's picking up. Big smile. Husband? Boyfriend? She's tidying up the magazines with her free hand. Just sit down and relax, why don't you?

...if none of that fits, ignore. Wild guess.

-Derek

I'd suggest finding a context within the main character's life where the story of Amy resides. Is she writing her observations in a journal? Is she blogging about it? Or is she merely extrapolating from what she observes, in which case you can do internalization like dpaterso suggested? Any of these can give you a lot, and you don't have to put the "story" all in one place. In fact, distributing the story can help keep up suspense.