"The Tale of the Not-So-Nice Dragon" is the last episode from Season 4 of The Backyardigans and serves as the series finale. It is a sequel to the two-part episode Tale of the Mighty Knights from Season 3.
"The Not-So-Nice Dragon has snatched up King Pablo and his Mighty Knights. Now it's up to the Flighty Fairy (Tasha) and the Grabbing Goblin (Austin) to rescue them!"
Tasha and Austin are sitting on the picnic table. They introduce themselves as the Flighty Fairy and the Grabbing Goblin. They explain that they are on their way to King Pablo's castle for tea as they sing the song "A Wonderful Day for Tea". The backyard transform into a medieval land as the Grabbing Goblin walks and the Flighty Fairy flies. The Grabbing Goblin reminds the Flighty Fairy about bringing a plate of mini-muffins. The Flighty Fairy shows the Goblin the plate to prove that she brought them. The Goblin tells the Flighty Fairy that she is small, like the muffins. The Flighty Fairy uses her magic wand to make herself grow taller.
The two creatures hear a shriek coming from the castle. King Pablo runs screaming out and runs into a bush. The Flighty Fairy and the Grabbing Goblin do the same, asking about why he is running. Pablo explains that a mean, destructive red dragon is chasing him. The Grabbing Goblin thinks that the dragon is a different dragon (introduced in a previous episode) and greets himself. King Pablo jumps and covers Grabbing Goblin's mouth with his hand and tells him that the dragon is certainly not the dragon he thought it was.
Pablo explains to the two that the only way to tame a not-so-nice dragon is to pull its tail and count to ten. the Flighty Fairy asks Pablo who will do it, and Pablo answers the question by introducing his mighty knights, Sir Tyrone and Knight Uniqua. The two knights distract the red dragon, but end up getting thrown in the moat around the king's castle by the not-so-nice dragon after trying to pull its tail. King Pablo commands the dragon to stop, but the dragon picks up the three royal beings and carries them to Dragon Mountain.
The Flighty Fairy and the Grabbing Goblin realize that they are the only ones who can save the three, and explain what they can and cannot do while singing "We're Not Knights". Tasha has an idea after the song is done: to get Dragon to help them save the knights and the king. The Flighty Fairy waves her magic wand and transports both herself and Austin to Dragon's cave near Dragon Mountain.
The two medieval creatures tell Dragon the story of why they need him, but Dragon is scared to go because of the red dragon. They encourage him to go by reminding him that their friends are there. The camera moves to inside the cave beside the red dragon where Uniqua, Pablo, and Tyrone are trapped in and sing the song "We're Stuck in a Cave". Uniqua notices that Dragon is flying over the red dragon. He lands silently on the floor. The Flighty Fairy and the Grabbing Goblin try to push the rocks away, but the not-so-nice dragon sees them because Dragon screamed when the other dragon's tail touched his.
The Flighty Fairy cast a spell to make the dragon sleep, but it didn't work. King Pablo warns that magic spells don't work on not-so-nice dragons. The mean dragon scares Dragon, the Flighty Fairy and the Grabbing Goblin away. Dragon lands back near his cave. The Grabbing Goblin apologizes to the Flighty Fairy for not staying calm. The Grabbing Goblin tells the Flighty Fairy that Dragon didn't stay calm either. Dragon admits that he did not stay calm. The Grabbing Goblin brags and tells the two others that he was the only one who stayed calm. The Flighty Fairy argues and tells him that she did not think he was staying calm. The Grabbing Goblin shouts at the top of his lungs that he stayed calm, alerting the red dragon that the group did not leave. The bad dragon begins to chase them.
The Flighty Fairy and the Grabbing Goblin control Dragon by moving up and down, left and right. They fly through the Flighty Fairy's forest and almost hit King Pablo's castle. They fly through the open door, but the evil dragon's wings get caught in the entrance and cannot leave. Dragon, the Flighty Fairy and Austin fly back to Dragon Mountain and try to free the knights and the king.
Meanwhile, back at the castle, the not-so-nice dragon has broken free and is flying back to Dragon Mountain. Pablo alarms the rescue team that the evil dragon has come back and the Flighty Fairy tries to use her magic wand to send it away. Pablo reminds her that spells do not work on not-so-nice dragons. The Flighty Fairy distracts the dragon while the Grabbing Goblin tries to grab the bad dragon's tail. The three captured royal beings cheer him on, and the Grabbing Goblin grabs it. The not-so-nice dragon tries to shake the Grabbing Goblin off, but due to the Grabbing Goblin's grabbing ability, it was unable to do so.
The Grabbing Goblin starts couting. When he reaches ten, the evil dragon begins to glow and transforms into a nice, blue-colored dragon. The dragon suddenly notices the evil he has done to King Pablo's court and frees them immediately. King Pablo invites the dragons to come over for tea.
When the characters arrive, they sing "Mini-Muffins" as they eat and drink their mini-muffins and tea. Tyrone's stomach growls and Uniqua asks why he is still hungry. Tyrone reminds Uniqua that mini-muffins are really small. He asks the others to continue the tea party at his house. They all accept as the party transforms back into the backyard. They enter Tyrone's house after singing the ending song. Tasha and Austin open the previously closed door and ask the viewer "Mini-muffin?", and the episode ends.