Soon, Farquaad's ghost arrives and Donkey remarks that he saw him die in the first movie, breaking the fourth wall. Farquaad then brings the stone dragon on his grave to life and makes it eat Shrek and Donkey in revenge for making Donkey's wife Dragon eat him. Donkey whistles for Dragon and she shows up sweeping Shrek and Donkey off the ground. The stone dragon chases them through the sky and blows fireballs made of magma at them, and Shrek lands on the stone dragon's back. He farts in its face, causing it to drop him onto Dragon's back. Dragon then flies into a canyon in a homage to Star Wars: A New Hope. She then creates a tunnel through a dead end in the canyon with her fire, and after going into the tunnel, the stone dragon follows, and its wings break off in doing so. After exiting, the animated statue falls to its watery grave, terminating the chase. Dragon, Shrek and Donkey then rush off to rescue Fiona.

Farquaad's true plans for Fiona is to kill her and make her his spirit queen so he can be the king of the underworld. Thelonious puts her on a raft going toward a waterfall known as Fairy Falls but forgets to get off. Fiona gets free and knocks him out, and then Shrek and Donkey jump onto the raft. It goes over the falls and the trio is temporarily saved by Thelonious. However, they fall again due to the branch Thelonious was holding breaking. Luckily, Dragon saves them before they all die and obliterates Farquaad by breathing a fireball at him.