Lily has become quite good friends with Bertha Dorset, mostly because Ned Silverton moved away from Carry Fisher and toward Bertha, which means Bertha needs someone to distract her husband while she flirts with the young poet.
Lily is fine with this – not because she's getting any money out of George, but because of the social stability that comes with their association.
Meanwhile, things are getting out of hand with Gus. Lily is used to playing verbal games, keeping everything in innuendos and subtleties, but Gus doesn't really know how to do this, and he's increasingly frustrated by their conversations. Also, he lost money, like everyone else in the fall.
Mrs. Trenor hasn't asked Lily back to visit Bellomont, which is disconcerting as well; Lily doesn't know if she's heard the rumors regarding her husband.
So, early in January, Lily asks Judy if she can join a party at Bellomont. Judy responds that she should "come by all means," which assuages Lily's concerns.
The party is a bit boring. Lily figures it's her job to get the party going, but she senses that Mrs. Trenor resents her efforts. She realizes that she's under suspicion, so she takes effort to avoid Mr. Trenor at all costs (and therefore cool the fires of gossip).
She returns to town from Bellomont, where the Brys are organizing a big social function. The plan is for a dozen "fashionable women" to display themselves in a series of living portraits done by the distinguished painter Paul Morpeth.
Lily is one of the fashionable women, and she's stoked to put her beauty on display.
All of society is bored, so they decide to come to the event. Even Selden.
All are awed by the grandeur of the newly-built Bry house.
Gerty attends as well, and is ecstatic to be near Selden. She's grateful to Lily for extending the invitation to her, and chats about how wonderful a girl Lily is – she even gave 300 dollars to Gerty's charity! She seems to think Lily is the cat's meow.
Selden greatly admires the living portraits, which are essentially a bunch of rich people inserted into classic scenes from famous paintings. Among the women featured are Carry Fisher, Mrs. Van Alstyne, Kate Corby, and, of course, Lily Bart.
Lily's portrait is the most beautiful. Rather than insert herself in a historic scene and pretend to be another person – like Cleopatra, for example – she chose a figure that basically looked like her already. This way she's not disguising herself at all. (See the portrait here.)
Ned Van Alstyne says something along the lines of, "Wow, that's gorgeous," which offends Selden, who feels a little protective of Lily. He decides he wants her again.
Later that night, Selden finally finds Lily alone. He hasn't seen her since the Van Osburgh wedding.
Lily gets all butterflies-in-the-stomach as he approaches; she feels as though she desires to be beautiful only for him.
He offers her his arm without speaking; in silence she takes it and they move out into the garden.
Finally Selden gets around to admitting that he's in love with her. They kiss; Lily tells him he can love her but he shouldn't tell her so, and then she runs away.
Oh, the drama. We just can't take anymore.
Selden, a little at a loss (poor guy), goes inside and meets up with Ned Van Alstyne and Gus Trenor. Trenor is angry that Lily put herself on display for men to ogle (he wants her all to himself, it would seem).