The whole section of Horror is able to give you the willies, but the transformation of Dr. Jekyll (and his Mr. Hyde form) traumatized many, many children who saw this film.
The way Hyde tries to drag a trapped Horror to the pit, even if it would make him had that same demise as well, gets even scarier due to his ill-lightened face, as seen in the page image.
The ghosts who float out from the horror novels laughing and moaning in a very sinister way and chase Richard and the three books to the mansion's roof.
The ominous and arcane red light flashing from downstairs in the haunted house. We never learn what it was.
The scene where the library rotunda ceiling paint is dripping down. Just looking at the giant wizard's face melting traumatized many kids, although not to the same extent as the Jekyll-to-Hyde transformation.
The Moby-Dick sequence also was creepy: Dark red sky, almost demonic-looking sailors and Captain Ahab maniacally yelling on the front of the rowboat.
Richard & Co. looking over the side of the boat, and seeing the whale rising up at them.
The dragon is an enigmatic shapeshifting monster of unknown origin (maybe demonic). On surface-level it appears as the last threat, a Final Boss. Upon closer examination it's terrifying. In constantly pursuing Richard, a mere child, the beast behaves more like Stephen King's It, than a giant fire-breathing predator. If it only showed up at the climax, it would've been a Giant Space Flea from Nowhere, but this thing is determined to get Richard. Suddenly his rantings about "health and safety", and being afraid to venture outdoors, sadly make a whole lot more sense. Richard doesn't even know what it is, or why it wants him, only that it's after him and he can't stop it.
It terrorizes him in his dreams at the beginning, enforcing that nowhere is safe from it.
Anyone can get caught in a storm. But a storm that's actively chasing you? Sending lightning bolts after you? While making lights explode after you? Evidently the monster's handiwork.
Richard's knocked unconscious, and as with the beginning, the dragon can easily get him. The monster shape-shifts into a monstrous painting abomination that melts off the ceiling to chase Richard. The poor kid can't escape, and it absorbs him. Fortunately, the Pagemaster pulls a Deus ex Machina to bring Richard into the worlds of Horror, Adventure and Fantasy as an illustration.
It tries to manifest as a gargoyle in the World of Horror.
In a deleted scene, the dragon demon took over a harmless frog later to terrorize Richard. Though temporarily subdued by Fantasy's wand at full power, this is a brief reprieve. Now angry, the dragon comes back bigger than ever, as Adventure reclaims his sword from its mouth.
Bearing in mind, Richard's journey has brought him to the World of Fantasy - where good endings prevail. This fiery beast is unphased by that fact, getting even more powerful and dangerous!
Now physically manifested as a 100-foot tall rampaging beast and its prey close to escaping, it's not playing around anymore. But even in physical form it can't be stopped, it's an invincible giant dragon where sword thrusts just bounce right off it.
It wickedly goes after the Books mid-chase, Richard's only companions as he's too afraid to make friends in the real world, evident this predator can resume the hunt whenever it wants. But it doesn't want Richard having anyone.
When it finally has Richard in its clutches who yells back at the giant he's not scared anymore. The dragon is visibly angry, before making him terrified as it snaps him in its mouth unharmed - reminding the boy it can easily destroy him, if it wants to. It just doesn't want to.
It swallows up Richard, who uses the book of Jack and the Beanstalk to escape its belly, and even then it doesn't stop this implacable fiend. It just chews up the beanstalk like its celery!
The Pagemaster explains that if he didn't bring Richard to the worlds of fiction, he would never have faced the demonic beast. All the antagonists praise the boy for his courage, but the dragon is mad as Hell he got away, roaring savagely at everyone.
In another deleted scene, Richard emerges back in the real world (or Dream Within a Dream). The dragon's furious he escaped and still won't let him go. It tries to follow, but unable to form as the Pagemaster bestows upon the boy a magical sword (featured in promotional videos) - a physical and metaphorical representation he's triumphed over it. Very much like fear though, he may never be free of the primordial horror, but has the courage to learn to live with it.
