Shrek and Donkey arrive at Farquaad's palace in Duloc, where they end up in a tournament. The winner gets the "privilege" of rescuing Fiona so that Farquaad may marry her. Shrek and Donkey easily defeat the other knights in wrestling-match fashion, and Farquaad accepts his offer to move the fairytale creatures from his swamp if Shrek rescues Fiona.
Shrek and Donkey travel to the castle and split up to find Fiona. Donkey encounters the dragon and sweet-talks the beast before learning that it is female. Dragon takes a liking to him and carries him to her chambers. Shrek finds Fiona, who is appalled at his lack of romanticism. As they leave, Shrek saves Donkey, caught in Dragon's tender clutches, and forces her to chase them out of the castle. At first, Fiona is thrilled to be rescued but is quickly disappointed when Shrek reveals he is an ogre.