It turns out Damon is still alive, and he was the one causing all the competition for the swords.
Zodac uses the three talismans to teleport the heroes inside Grayskull. At the same time, Skeletor and Damon battle for dominance. Their battle combines their collective power and opens a portal directly to Castle Grayskull. Skeletor goes through it, but only after finishing off Damon.
Inside the castle, the heroes are presented with several doors, and each leads to dead ends or traps. Teela, arriving in a maze, finally decides to blow open a hole in the floor with her blaster and drops down, finding Skeletor in the process of joining the two halves of the Power Sword. He-Man and Battle Cat also arrive, and a battle ensues.
Meanwhile, Zoar rescues The Goddess, and the Power Sword is rescued from Skeletor. The Goddess appears to the heroes and condemns Skeletor to the same fate to which he subjected her.