The episode starts out kinda randomly.  There are a few shots of the destroyed Fanelia, and of Folken losing his arm (lots of blood.  Ick).  Finally, once it settles down about 25 seconds later, we see Folken standing amongst the rubble that was once Fanelia
Folken: "Fanelia, the land protected by dragons, has been ruined by one who inherited the blood of dragons...
He flashes back to the previous episode when Naria and Eriya died in his arms
~Folken~: "Naria, Eriya..."
~Eriya~: "We're glad to have met you."
~Naria~: "And we're dying while you're by our side."
~Eriya~: "Goodbye, Lord Folken."
Back in reality...
Folken: "Why doesn't my wish come true?"

Back in Asturia, which has also suffered damage, people argue about attacking Zaibach
Diplomat 1: "This isn't war!"
Diplomat 2: "Right.  The Empire hasn't announces the abrogation of the treaty!"
Diplomat 3: "It would be better to postpone the request for compensation."
Diplomat 2: "Naturally!  The girl named Hitomi is the only thing Zaibach wants!"
Diplomat 1: "If we hand over the girl, they won't attack us."
Diplomat 3: "But we destroyed their floating fortress.  It's better to get rid of the source of misfortune before they retaliate!"
Allen: "If we hand over Hitomi, Gaea might be ruined!"
Diplomat 2: "The power of Atlantis is mere superstition!"
During the argument, it is shown that someone (the king, probably) is in bed, with Millerna watching over them
Diplomat 2: "As long as we're true to the treaty with Zaibach, we'll be safe!"
Dryden: "Aren't you making assumptions?  Even if we hand Hitomi over, the people won't be satisfied.  The people who lost their homes and families because of their unprovoked attack won't be.  As proxy for Kind Aston, I, Dryden, order you, according to the treaty with neighboring countries, to impose economic sanctions against Zaibach."
During all this, is Van just thinking real hard, or is he asleep?  Well, this looks like a dream sequence coming up, so you never know ^_^*
~Townsperson 1~: "Folken's a coward."
~Another Guy~: "Folken ran away from the dragon hunt."
~Someone Else~: "He's a coward who abandoned his country."
~Little Van~: "No!  My brother is... My brother is..."
Another shot of a weird mural shown at the beginning of the episode.  Well, this is a dream-as-a-plot-device, so we're going to go somewhere else for a sec.  How about out in the hall where Hitomi and Merle are hanging out?  Eh, but that doesn't last too long.  The doors open, and everyone comes out of the conference room
Merle: "Lord Van!"
Hitomi: "How did it go?"
Allen: "I wish the situation had improved, but..."
All the diplomats walk by and give Hitomi dirty looks
Van: "Sanctions are meaningless against them.  Folken has run away again.  Everything's his fault... so, I'll kill him."
Well, to be so forward
Hitomi: "W...what are you saying?"
Van: "As the King of Fanelia, I'll avenge the people who were killed."
Hitomi: "He's your brother, right?  Don't think such things!"
Too late, Van's already trudged off to do his dirty work, with Merle following.  Hitomi tries to go after them, but Allen restrains her
Hitomi: "Taking killing and dying for granted..."
Allen: "It's fine to believe in your wish, but I might have to keep you in a bird cage some day."
Hitomi: "Don't say... such things."

Later that night, Hitomi is sitting in bed, thinking about Folken and Van
~Naria~: "I'm happy just serving Lord Folken."
Hitomi: "Naria trusted in Folken until the end."
~Naria~: "If I take you, you'd just be a burden.  Hurry, Eriya!  Let's go to Lord Folken!"
Hitomi: "Van's brother...?"
There's some faint howling outside.  Aaah, it's the wolfmen, come to get her!  Well, it's wolfmen, but they're the nice guys from the second episode
Hitomi: "A wolf...?"
Her pendant starts to glow
Hitomi: "Someone's calling?"
Pendants, by AT&T.  ^_^*

Out at his windmill, Van hears the wolf, too.  He goes out to investigate
Wolf: "Van Fanel?"
Van: "Are you the one who called me?"
Wolf: "I have a message from Clan Leader Ruhm.  Folken's waiting for you in Fanelia."
Van: "What?"
Hee hee!  Another flashback to little Van!  He's on a horse with Balgus, looking all happy and cute
~Some Guy~: "I don't think Folken will be suitable."
~Another Guy~: "Rumor says that he ran away and left the country."
~Someone Else~: "I thought he was too young for the dragon hunt to become king."
~Balgus~: "Guys, restrain your speculative talk!  Don't worry, Lord Van.  Lord Folken will return.  He will."
Back in the real world, Van is running.  Great, is he gonna run all the way back to Fanelia?  Thankfully, he's got more sense than that, and is running to get Escaflowne.  However, he sees someone else in the woods
Van: "Who's there?"
We see a foot with a tennis shoe.  Since tennis shoes are rather uncommon in Gaea, it's pretty obvious who it is
Van: "Oh, it's you."

That morning...
Allen: "Escaflowne has disappeared?"
Dryden: "What's he thinking at a time like this?"
Meanwhile, Merle is scampering around the room, looking for Van and Escaflowne under blankets and in boxes ^_^*
Merle: "Lord Van, where are you?"
Just then, Millerna stops by the windmill
Millerna: "Allen, have you seen Hitomi?  I can't find her in the castle, and her room's been cleaned."
Darn that maid
Dryden: "That means..."
Allen: "They're together."
Merle: "Could she be flirting with Lord Van?"
Mole: "I saw them last night."
Looks like the Mole Man hitched a ride under Millerna's carriage
Mole: "Hitomi and Van..."
Gaddess: "You bastard...!"
Mole: "I saw them together."
Gaddess grabs the mole
Gaddess: "Why were you hiding under the carriage?"
Merle runs in and grabs the mole
Merle: "Hey, are you sure you saw them?  Did they elope?  Waaah!  I wanted to be the one to marry him!"
Allen looks at the sky
Allen: "It would seem the bird cage is necessary."

Meanwhile, Hitomi and Van are flying the friendly skies, via Escaflowne Air
Van: "What're you going to accomplish by coming with me?"
Hitomi: "It'll be okay, because it's not a trap."
Van: "What're you saying?"
Hitomi: "It's from Ruhm, right?  Is Folken a person who lies to his friends?  You'll understand if you see him, right?"
Van: "Don't yell in my ear!  I can hear you."
Hitomi: "Sorry."
Van: "I'll keep my promise.  I'll take you back to the Mystic Moon, or to Allen.  I'll take you back."

Over in Zaibach, business is proceeding as usual
Sorcerer 1: "The shadow of the Dragon is overlaid upon that of the girl from the Mystic Moon."
Sorcerer 2: "I don't see any irregular fate density."
Dornkirk: "Folken's plan is working.  Don't worry.  The new future will begin very soon."

Oooh... swirly ceiling... Oooohhhhh.... @_@
Adelphos: "The Vione was destroyed, and Folken's missing.  That impudent Asturia's turned against us, along with its allies."
General 1: "But the Emperor doesn't appear to be making a move!"
General 2: "Even if they're allies, they're only a group of incompetents.  Although Lord Dornkirk hasn't made his move, he still counts on us, his four generals."
Adelphos: "I hope so."
Adelphos goes out to the balcony and looks out over the gardens.  There's a short-haired young woman out there, absently examining the flowers.  She picks up a leaf with a snail on it and examines it curiously.  Adelphos watches her intently as she appears to want to eat the snail (o_O Escargot.  Yum)
General 3: "What's wrong?  You look pale."
Adelphos looks back out at the girl.  A dog man has taken her by the hand, and is shaking his head, reprimanding her for whatever she was going to do with that snail
Adelphos: "What's happening to Zaibach?"

In Fanelia, Folken's being bored.  He's hanging out on a rock, whistling that ol' Fanelian folk tune (oddly enough, this is in fact a bgm track on the CDs called "Fatal".  And it's not Nakata Jouji whistling, either ^_^*)
Ruhm: "Do you think he'll come?"
Folken: "He will.  It's Van."
Seems to be their reasoning behind everything he does
Ruhm: "Even though you know each other so well... Hm?  Here he comes."
Wolf people must have good eyes.  But, sure enough, that little speck is Escaflowne.  Van buzzes Folken and Ruhm then looks back, irritated
Van: "Brother..."
He circles a couple of times
Folken: "Just like unpredictable elements... They amuse me."
Probably referring to the fact that he brought Hitomi along.  Van pulls a Harrier and somehow does a gentle vertical landing with Escaflowne
Ruhm: "Girl, I knew you'd still be with Van."
Hitomi blushes.  Oh, and in case you didn't know, I'm pretty sure Ruhm was the wolf guy who picked them up at the beginning of the second episode
Ruhm: "You must be worried, but leave them alone.  I'm not taking sides.  Van, Folken, later."
Folken: "Thank you, Ruhm."
Van: "Did you come alone?"
Um, does having Ruhm there count as "alone"?
Folken: "Do you think I'd set my brother up?"
Van jumps off Escaflowne
Van: "You're not my brother!"
Hitomi: "Van!"
Van: "Look what happened to the country you abandoned!  The green land protected by dragons is totally ruined."
Folken: "Do you hate me, this Folken Fanel?"
Van: "I'll make you atone for your sins with this royal sword!"
Whoa, I think he's serious.  Or maybe a little off the deep end
Hitomi: "Van..."
There're a few shots of everyone looking angrily at each other, and then the wall next to Van conveniently explodes
Hitomi: "What's that?!"
Well, they need to make good use of those CG dragons, so one decides to show up
Van: "Earth Dragon..." 
Hitomi turns around, and there's another dragon sitting on top of Escaflowne
Van: "What the...?  He's...  Folken planned this from the start!"
Hitomi: "No!"
One of the dragons lunges at them, and Van dodges and grabs Hitomi
Van: "It's only been a few months, but Earth Dragons are already wandering around.  This way!"
The two flee into an alley, with the dragons in pursuit.  However, the alley is too narrow for them.  But Van and Hitomi are also cornered
Folken: "Drop your sword, Van.  Get rid of your fighting rage, then the dragons will leave."
Van: "Don't be ridiculous!  How can I trust such nonsense?"
He doesn't have time to trust it.  A dragon breaks through and spits fire at them.  Van grabs Hitomi and dives into another alley
Van: "Damn... Folken!  Show yourself!"
Folken: "Fighting created nothing.  Yes, I failed in the dragon hunt to become king."
There is a flashback to Folken fighting the dragon.  The dragon is lying on the ground, apparently dying, and Folken is quite winded.  He looks into the dragon's eye and lowers his guard.  Just then, the dragon strikes and tears his arm off.  He lies on the ground, looking at the dragon fearfully
Folken: "I was prepared to die.  But..."
The dragon suddenly has a change of heart and backs down, retreating into the forest
~Folken~: "Am... am I safe....?  No, with my body..."
Yeah, he's minus an arm and bleeding all over.  But, he awakens to a familiar voice
~Dornkirk~: "Nobleman from the country protected by dragons..."
~Folken~: "Who are you?"
~Dornkirk~: "My name is Dornkirk.  I am attempting to control fate by using the power of Atlantis."
~Folken~: "Power of Atlantis...?"
~Dornkirk~: "The reason you survived is because of the power of Atlantis within you.  Let's create a world free from war."
Folken sits up on the operating table
~Folken~: "Is this place...?"
He then notices that he has acquired a new appendage.  He sees his metal arm and screams.  End flashback
Folken: "Since then, I learned science from Dornkirk, and became a Sorcerer of Zaibach, for an ideal future."
Van: "Then, you sold your soul to Zaibach?!"
The dragon is coming for them, though!  It leaps down from above, separating Hitomi and Van
Hitomi: "Van!"
Van: "Run, Hitomi!  Run!"
Insert Forrest Gump reference here.  Hitomi does as she is told and runs, while Van goads the dragon
Van: "Come on!"

Back out in the open, Hitomi makes a run for it.  She hears dragons roaring all around, so runs up some stairs.  However, at the top of those stairs waits a dragon.  She appears trapped, but someone grabs her by the mouth and pulls her into an alcove
Folken: "Quiet."
The dragon lowers its head and looks in at Folken and Hitomi.  Hitomi is tense, then realizes the dragon isn't attacking, and relaxes, as Folken takes his hand away from her mouth.  The dragon then leaves, and Hitomi falls to her knees and breathes again
Folken: "I want you to trust me.  I want you to help me."
Hitomi: "Just like Naria, aren't you?  Your body was modified for someone's convenience."
Folken: "Naria...?  You're..."

Elsewhere in town, Van is getting smacked around by the dragon

Hitomi: "But Naria's dead, and so are many people of Fanelia and Asturia."
Folken: "That's why we must change the fate of people who seek blood.  We must bring peace to Gaea."
Hitomi: "Folken..."
Folken: "Dornkirk's theory isn't wrong.  I'll learn the rules of fate and change the world as I like, just like the people of Atlantis did."
Hitomi: "That's not what changing fate is supposed to mean, is it, Folken?"
~Naria~: "Your wish will come true, right?"
Hitomi: "Naria..."
This thought is interrupted by a dragon.  Actually, two dragons.  They have cornered Van below where Hitomi and Folken are standing
Hitomi: "Van!"
Folken rips open his tunic and leaps to his death.  Or would have if he didn't sprout wings :P
Hitomi: "Folken..."
However, unlike Van's white wings, Folken's are pitch black.  Folken lands in front of the dragon, next to Van
Van: "Brother..."
Folken: "Drop your sword, Van!  Drop your sword.  Drop it!"
This time Van's a good little brother and drops his sword.  The dragons immediately back down
Hitomi: "The dragons... the dragons are leaving."
Folken: "Van, your anger and fear draws the dragons.  Like a drop of water creates ripples, anger and fear create war.  I'll change the fate of people, so I can create a new world where anger and fear do not exist."
Van: "A world without war..."
Aww.  A flashback to little Van and Folken.  Folken's telling Van a bedtime story
~Folken~: "The hero defeated a troublesome dragon, and became the King of Fanelia."
~Van~: "Brother, why did he kill the dragon?  It's so mean."
~Folken~: "Right, Van.  It's mean to kill a dragon."
Folken: "I wanted to remove the pressure of being the King of Fanelia, who is fated to fight.  And my wish was to see a new world with you.  However... the inhumane methods or Dornkirk were... our methods were wrong."
Hitomi comes running down, but since the two haven't killed each other yet, things look okay.  Folken extends his (metal) hand to Van
Folken: "Van, join me... Dornkirk must be..."
Van: "Brother... your wings..."
Hitomi: "The reunion took place in Fanelia.  But, when I looked, Folken's wings were colored as black as darkness."