As Erza Knightwalker is about to kill Lucy, Happy and Carla, Erza and Gray arrive and save the group. Erza tells Gray to leave with the others and find Natsu and Wendy while she battles Knightwalker. As the group heads to save Natsu and Wendy, Gray explains that Gajeel was the one who turned him and Erza back to normal and that Dragon Slayer Magic is able to change the Lacrima back to their original form. Happy tells Gray that they know the location of the Giant Lacrima and Gray asks him to take Gajeel there. Happy leaves to go to Gajeel while the three continues to look for Natsu and Wendy.
Happy finds Gajeel fighting with some of the Royal Guards. Before Gajeel can even express his surprise at the sight of him, Happy immediately grabs him and carries him to the floating island above the Royal City. Gajeel prepares to change everyone to normal when Pantherlily arrives and attacks the two. Happy is surprised to see that Pantherlily has wings similar to an Exceed's but Gajeel ignores this and tells Happy to stand back while he begins to battle Pantherlily.
Gajeel uses his Iron Dragon's Sword to attack but Pantherlily easily dodges the attack and attacks with his Bustermarm Sword that is able to fragment the floating island, surprising Gajeel. Happy uses his Aera to help Gajeel fight in the air and Gajeel is impressed with the power of his opponent. Gajeel gets pumped up after seeing an enemy that is near his level while Happy complains that Gajeel is heavy. Gajeel tells Happy to land him, saying that he can't wait to fight Natsu and Happy in the air when he finds himself his own cat. Pantherlily then attacks the duo with his sword but misses and ends up cutting off a fragment of the island. Gajeel and Pantherlily then ready themselves to continue the fight.
Pantherlily continues to attack Gajeel with his sword but misses. Happy begins to panic, thinking that the fight is completely one-sided but Gajeel merely laughs, saying that the fun has just began. Pantherlily then appears from the side and attacks again. Gajeel defends with his Iron Arm and prepares to fight for real. Pantherlily then slices Gajeel with his sword but Gajeel stops it with his arm. Pantherlily is impressed with the Earthland Mage, saying that his sword is able to crush even iron. Gajeel tells him that his Iron Dragon's Scales are not ordinary iron and, seeing that Pantherlily is an Exceed, asks him why he is with the Royal Army. Pantherlily attacks Gajeel again, saying that he abandoned his homeland since it's full of lies. Gajeel stops the sword from slicing him and breaks it, saying that he would make Pantherlily his cat.
While Pantherlily expresses his surprise with his broken sword, Gajeel approaches and throws punches at him. Gajeel then attacks with his Iron Dragon's Roar, sending Pantherlily to the ground. Pantherlily recovers and, impressed with his strength, smiles at Gajeel. Pantherlily then attacks Gajeel and Gajeel counters with his own attacks. As the two fight, the Dragon Chain Cannon is fired and connected to the Lacrima Island. Gajeel is surprised with what is happening and Pantherlily, with a smile on his face, explains that the Royal Army is planning to hit Extalia with the Lacrima Island, destroying both islands. Happy looks at his fellow Exceed in horror, asking him how he could they do such a terrible thing.
Seeing their friends trying to stop the Lacrima Island from colliding with Extalia, Happy and Gajeel go to help them. Pantherlily asks Gajeel if he was running away but Gajeel tells him that he is not running away or hiding from him, he will return to fight him when they stop the Lacrima Island. Pantherlily tells him that his efforts will be futile and that there will be no more later for them. Gajeel smiles at him and promises to bring, or drag, him back to the guild and make him his cat.
Just as the Lacrima Island is about to collide with Extalia, reinforcements arrive. Carla, Wendy and all the Exceeds arrive and try to push the Lacrima Island away. With their combined efforts, the Lacrima Island is being pushed back when a blinding light from the sky appears and everyone see that the Giant Lacrima is missing. Suddenly, Mystogan arrives and tells the group that the Lacrima has been returned to Earthland and that everyone from Fairy Tail and Magnolia are safe. Everyone cheers and Mystogan reveals his face to Pantherlily. Pantherlily thanks him and addresses him as prince when the Royal Army arrives and Knightwalker shoots Pantherlily with her Magic Spear.