The film begins with Prince Charming riding to Dragon's Keep in an attempt to save Princess Fiona, while narrating her backstory from the previous film. However, on arrival, Charming finds out from the Big Bad Wolf that Fiona has already left on...
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The film begins with Prince Charming riding to Dragon's Keep in an attempt to save Princess Fiona, while narrating her backstory from the previous film. However, on arrival, Charming finds out from the Big Bad Wolf that Fiona has already left on her honeymoon with Shrek. Shrek and Fiona are then shown on said honeymoon.

When they return to their home in the swamp, a Royal entourage appear and invite the newlyweds to attend a Royal Ball being held by Fiona's parents, taking place in the kingdom of "Far Far Away" (Fiona's home). Shrek, Fiona and Donkey set off to attend the ball.

On arrival at the Royal castle, Doves are released to honour the newlyweds, but once Shrek, Fiona, and Donkey step out of the onion carriage, the crowd and Fiona's parents are shocked by their appearance. Despite this, the couple are invited to attend dinner with the King and Queen.

During the meal, Fiona's father Harold gets involved in an argument with Shrek, which ends with Shrek telling Fiona that they are leaving Far Far Away. Upset, Fiona heads to her room and is crying on the balcony when The Fairy Godmother appears to her, giving her a business card. However, The Fairy Godmother also plots with King Harold to usurp Shrek so that her son Prince Charming can marry Fiona in Shrek's place. They secretly hire Puss in Boots (Antonio Banderas), to kill Shrek on a hunting expedition that Harold suggests. Shrek agrees to the expedition in an attempt to bond with Fiona's parents.

The next morning, Shrek and Donkey are lost in the woods when Puss In Boots ambushes them. They are able to subdue the cat, who agrees to join them after Shrek decides not to take revenge on him. Shrek remembers the card Fairy Godmother gave him, and decides to enlist her help in winning over Fiona's parents. Shrek, Puss and Donkey use the card to travel to her Potion Factory. However, Fairy Godmother refuses to help Shrek on the grounds that "Ogres don't live Happily Ever After". Undeterred, the three friends sneak into the Potion Containment Room, where they steal a Happily Ever After potion.

Back in the woods, Shrek and Donkey drink the potion, but nothing happens. Shrek sniffs the potion and sneezes on a toadstool. Once it begins to rain, Shrek, Donkey and Puss head for a barn and stay there for the night, failing to notice that once the rain touches the toadstool, it turns into a rose. Inside the barn, Shrek and Donkey faint. Back in Far Far Away, Fiona is affected by the potion too and faints. The next morning, Shrek and Donkey wake up to realize they have changed. Shrek is a handsome human while Donkey is a noble white stallion. Shrek needs to find Fiona and kiss her before midnight to stay the way they are.

On returning to Far Far Away, Fairy Godmother tricks Shrek into thinking that Fiona loves Charming, while Fiona is led to believe that Charming is actually Shrek himself, in human form. Because she does not like this "New Shrek", Fairy Godmother gives Harold a potion which will cause Fiona to fall in love with the first man to kiss her (Charming). Harold is to slip this potion to his daughter in a cup of tea. Meanwhile Shrek and his friends have been arrested by The Royal Knights. However while watching the Royal Ball coverage on the Magic Mirror, Gingy, Pinocchio, the Three Little Pigs, the Three Blind Mice, and Big Bad Wolf see a trailer for a show named KNIGHTS (A parody of COPS), revealing Shrek's arrest. They head off to Far Far Away to help Shrek.

Meanwhile, King Harold slips the love potion into a cup of tea for Fiona. After he finds her up in the castle, watching the ball, she says she wants her old Shrek back. She then takes a cup of tea. Harold encourages her to go to the ball, telling her that "People change for the ones they love", and after Fiona drinks her tea she goes to the ball.

Back in the dungeon of a far away jail, the fairy tale creatures save Shrek, Donkey, and Puss and create a giant gingerbread man named Mongo with help from the Muffin Man. They use the giant cookie to break into the ball. Fiona and Charming begin to dance at the ball, while Mongo begins to pull down the drawbridge, but the guards dump hot milk on him and his arms fall off. Shrek manages to get through the cracks of the drawbridge and lowers it. Shrek and Donkey charge into the ballroom and the fairy tale creatures begin to fight Fairy Godmother. Fiona realizes it's not Shrek she's dancing with. Fairy Godmother tells Charming to kiss Fiona to activate the potion. But once Charming is done kissing her, she knocks him out with a head butt, revealing that Harold gave her the wrong tea on purpose, after feeling guilty about his actions. Shrek and Fiona embrace one another, but Prince Charming gets the wand and tosses it to the Fairy Godmother and she proceeds to turn on Shrek, telling once again that ogres don't live happily ever after. She then sends a blast of magic out to kill Shrek. Harold uses his armor to deflect the spell which bounces off and hits her. Fairy Godmother disappears, with only her glasses and wand left. Harold is back to his true form, a frog. Shrek and Fiona are about to kiss, but Fiona tells Shrek she wants to live happily ever after, with the ogre she married. Shrek, Fiona and Donkey return to their true forms. Harold apologizes to Shrek and tells him that he only wanted Fiona to be happy. He gives the couple his blessing and goes to leave, however Queen Lillian tells him that she still loves him, even though he's a frog. That night, the gang dance into the night, having a big party.

After the party, Donkey is all alone, singing a song. Puss and two girls are about to head off to the "Kitt Katt Klub" when Dragon comes and tells Donkey that she has had babies. Donkey and Dragon are now proud parents of a litter of mutant dronkeys - donkey/dragon hybrids.