Tabaluga (the last dragon on Earth), is growing up in lush Greenland. While searching for his dragon fire, he meets a beautiful ice princess, Lilli, from frozen Iceland. The inhabitants of the two lands are highly suspicious of each other, but Tabaluga and Lilli are surprised to find out that the prejudices are wrong, and they like each other. Lilli takes Tabaluga to see Arktos, the ruler of Iceland, not knowing that Arktos has frozen all the dragons and killed Tabaluga's parents. Arktos tries to kill Tabaluga with his magical ice weapons, but Lilli and her polar bear friend Limbo help him to escape and go with him to Greenland. Tabaluga and Lilli begin a romance. Arktos sends an army to invade Greenland. Tabaluga's old raven guardian, Kolk, advises him to visit the wise Nessaja in the swamps, who tells him that his fire was always in his heart, though the dragon does not believe her at first. Lilli returns to Iceland to try to inspire a popular uprising against Arktos, but he captures her and then traps Tabaluga, who follows her. When Arktos moves to kill Lilli, Tabaluga finds his fire and fights against Arktos's ice weapons. Lilli steals Arktos's hat, which blinds Arktos, and Tabaluga is able to melt Arktos to a tiny size; Arktos flees. The Icelanders and Greenlanders become friends.