When the creature showed up...
Judging on the reactions thus far, it would seem that a more detailed description of the combat situation might be helpful. As a player in this group, I'll try to do so.
As mentioned, we were exchanging blows with a pair of young dragons in a small cave. There wasn't an awful lot of room to move in, so with our party of three having taking some burns and scratches, we opted to make a tactical retreat around the corner when the pair of spellcasters showed up.
As soon as we had retreated and were preparing to mend some of the damage taken, the big illusionary dragon showed up. Having encountered the young dragons just then, and having encountered this big dragon earlier, we initially assumed it was very real. We put some more distance between our party and the big nasty, and proceeded to patch up our paladin, who primarily serves as the tank. Sure, something was odd about the dragon just standing there roaring, but we still assumed it was real. When the paladin was back up to full health, we did what we usually do - we threw him at the biggest monster in sight. He charged the illusionary dragon, spending his last smite evil, swung at it, and then noticed something was amiss as his sword didn't seem to pass through scales and flesh. He was given a save, which he did make.
In the meantime, one of the enemy spellcasters had used Dimension Door to teleport behind our position, and just prior to the charge, put down a carefully placed Silence, which foiled our initial plan that involved heroically teleporting the hell out of there. In addition, the silence prevented us from hearing our paladin yell that the dragon was an illusion. On his turn, our wizard moved out of the silence and threw a lightning bolt at the illusion. The bolt obviously did nothing, and the wizard was given a save, which he failed. I, being the cleric, was also facing the dragon, but was not given a save after I saw the bolt pass through it.
The next turn started, and our paladin, now disbelieving the illusion, moved straight through it and attacked the Lamia that had by now moved around the corner. When we witnessed our paladin ignore this super massive dragon that appeared out of nowhere and was curiously nonaggressive, the two of us decided, in character, that the dragon must have been an illusion, and instead focused on the other spellcaster, much to the chagrin of our GM.
I still feel that we acted reasonable, despite his complaints.