A week after Wendy and Carla's welcoming party, Gray returns to the guild after having been gone for a few days. He tells Natsu about a rumor he heard in a nearby town, that a lady named Daphne has spotted a Dragon. 
Once Natsu, Wendy, Carla, and Happy, are trapped by Daphne's Concealment Magic in her inn, Gray appears. He reveals himself to be conspiring with Daphne, and challenges Natsu to a battle to settle everything once and for all. Daphne stresses how she needs the Dragon Slayer for her plans as the battle begins. 
As the two fight, Natsu asks Gray why he is betraying Fairy Tail. Gray references "A City Without Sound," but Natsu not understanding causes him to continue attacking. As they fight, Daphne reveals how she came to Magnolia searching for info about Natsu, and that Gray willingly volunteered to help her. They fight evenly, until Natsu seemingly defeats Gray, but Gray is able to freeze Natsu's feet to the ground, allowing Daphne to use Hidden Darkness. 
The inn soon disappears and Gray is spotted by Erza and Lucy
The spell traps Natsu in Daphne's invention, the Dragonoid. After Daphne explains her plans, Macao, Elfman and Wakaba arrive on the scene in a four-wheeled magical vehicle driven by Macao.