During the Full Armor Gundam's second sortie in the Thunderbolt Sector, Io once again confronts Daryl. Daryl narrowly escapes after throwing a Cracker grenade at the Gundam, but he loses his left hand in the process. As the Living Dead Division is desperate to hasten the Reuse P. Device project to combat the Gundam, Daryl has his right hand amputated so that his body will have full control of the experimental Psycho Zaku.

The Moore Brotherhood receives reinforcements from the Earth Federation, but the new mobile suit pilots are young teenagers, much to Io's chagrin. Feeling the pressure of the war, Claudia resorts to drugs before Io snaps her out of an overdose. Io leads the young cadets to break through the Living Dead Division's final defenses, but the battle becomes a massacre due to the young pilots' inexperience.

With both sides suffering massive casualties, the Full Armor Gundam engages in a final showdown with the Psycho Zaku. Meanwhile, the surviving members of the Moore Brotherhood board the Dried Fish to take it over, but the remaining members of the Living Dead Division refuse to be taken prisoner and plan to self-destruct the vessel along with everyone on board. The Federation survivors manage to neutralize the Zeon crew and seize the Dried Fish, while Io and Daryl's battle results in heavy damage to both of their mobile suits. A Zeon reinforcement fleet then arrives and captures Io and the Federation survivors while rescuing any remaining Living Dead members.

During the Earth Federation's assault on the Zeon's A Baoa Qu fortress, Io and his comrades escape captivity while several Zeon forces retreat, taking Io's Gundam with them. Eight months after the end of the One Year War, the Federation continues to battle Zeon remnants on Earth. The Federation carrier Spartan enters Earth orbit, but a Musai-class ship launches its Komusai shuttle for a kamikaze run on it. Suddenly, a new Gundam piloted by Io is launched from below and it slices the Komusai in half to save the Spartan.

The South Seas Alliance, a cult faction of the Federation, plots to declare itself independent. Furthermore, it is discovered that they possess the Reuse P. Device technology of Daryl's Psycho Zaku. The Spartan is assigned to track and destroy the Psycho Zaku before the South Seas Alliance can mass-produce the technology. In Antarctica, Bianca's squadron is ambushed by Zeon mobile suits. Io sorties in the Atlas Gundam and dispatches the enemy units before facing a Grublo mobile armor. The battle sends both units far too deep underwater and Io with his equipment lost slowly sinks to the bottom of the sea, but Bianca in her damaged Guncannon Aqua lifts him back to the surface.

Due to the emotional trauma Karla suffered during the One Year War, her mind has regressed back to that of an adolescent child with the Zeon Remnants now trying to take care of her in hopes of her adult mind to recover. Daryl's Acguy squadron heads to a South Seas Alliance-controlled city in Southeast Asia to retrieve a spy, but their cover is blown and they must fend off against the island's mobile Suits. Meanwhile, the Spartan is confronted by a South Seas Alliance mobile suit Squadron, with Io's former commander and lover Claudia leading them.

As tensions are high between the Spartan and the South Seas Alliance, Daryl's team is also having trouble in their hands finding their way out against a counterattack by the cult group. During the battle, several cultists break into the Spartan while Daryl manages to extract the Zeon spy out of the island. Meanwhile, Io and Bianca storm through the squadron of Dodai YS units to take back Claudia, but they are thwarted by Gouf pilot Chow Ming. Despite the temporary victory, Io learns the truth about who is running the South Seas Alliance.