Prince Charming rides his horse into the dragon's keep to rescue Princess Fiona. To Charming's surprise, she was already out of the tower - the Big Bad Wolf informs him that Fiona's on her honeymoon.
Shrek and Fiona are celebrating their honeymoon at various places. When they return home and see Donkey, they receive a message from Fiona's parents, who are the King and Queen of the kingdom of Far Far Away for a royal ball and a blessing upon her and her Prince Charming.
It takes Shrek, Fiona and Donkey several days from Shrek's swamp to Far Far Away, a glamorous kingdom filled with fashion and royalty. As Fiona and Shrek reveal themselves, the kingdom is in shock and disbelief. King Harold is shocked that Fiona's husband is an ogre. His anger escalates while Shrek, Fiona and Donkey are having dinner inside the castle. This causes a fight between Shrek and Harold.
The fight makes Fiona upset. As she cries, her tears drop and summon her Fairy Godmother. Fiona gives Shrek a card that reads "Happiness is just a tear drop away". The Fairy Godmother is secretly an ally of King Harold and is the mother of Prince Charming, who went into the Dragon's Keep after Shrek found Fiona. King Harold goes into a bar called The Poison Apple and looks for an ogre killer. The killer happens to be the famous feline Puss in Boots.
Shrek and Donkey are told by King Harold to be at the forest, where Puss attacks Shrek. Puss explains to Shrek that Harold paid him to assassinate Shrek. Shrek wants to make Fiona happy after Donkey cries on the Fairy Godmother's card with a potion.
Shrek, Donkey and Puss arrive at the Fairy Godmother's cottage and disguise themselves as workers. Puss finds a potion in the potion room called "Happily Ever After" that reads "beauty divine". The three take the potion and leave the building. Shrek and Donkey take a sip of the potion, but it doesn't seem to do anything. The day turns to a rainy night as Shrek and Donkey become drowsy from the potion. Back in Far Far Away, Fiona prepares to find Shrek so they can return home, but she too falls asleep.
As they all wake up, Shrek discovers that he's been turned into a handsome human and that Donkey has become a White Stallion. They learn that in order to make the potion's effects permanent, Shrek and Fiona must have True Love's Kiss by midnight. Meanwhile, Fiona is also turned back into a human since Shrek drank the potion. She meets Prince Charming, who is pretending to be Shrek now that the Fairy Godmother realized one of her potions was stolen. Shrek leaves the castle after Fairy Godmother convinces him that an ogre and a princess aren't meant to be together, and that Fiona will be happier with Prince Charming. Prince Charming tells Fiona to dance with him at the royal ball.
Shrek, Donkey and Puss go to the Poison Apple, where they overhear Fairy Godmother talking with Harold. Fairy Godmother gives Harold a love potion to ensure Fiona falls in love with Charming. When Harold refuses to do so, she threatens him by telling him that she can undo his "happily ever after" if he doesn't obey. Shrek, Donkey and Puss get discovered and arrested. As the royal ball begins, Shrek's friends at his swamp watch pre-recorded footage of the human Shrek confirming his true identity. Gingy, Pinocchio and the others go to the Far Far Away prison and free the three captives.
Gingy helps Shrek come up with an idea to crash the royal ball thanks to a giant gingerbread man named Mongo. They make it to the castle, but are too late to stop Charming from kissing Fiona. However, Fiona headbutts Charming, and Harold reveals he did not give Fiona the tea with the love potion inside. The Fairy Godmother retaliates by shooting from her wand towards Shrek and Fiona, but Harold jumps in front of the beam. It bounces back from Harold's armor and zaps the Fairy Godmother, killing her.
Harold transforms into a frog and wants Shrek to accept his apology. Shrek and Fiona decide not to kiss so they can be ogres again as well as Donkey be a natural donkey. The two kiss again as everyone resumes the festivities with Puss and Donkey singing "Livin' La Vida Loca".
As the party winds down, Donkey laments over being alone, being too dejected to be comforted by Puss. Suddenly, the Dragon returns, revealing she and Donkey are a couple with some baby dragons. Happy to see the family again, Donkey remarks "I gotta get a job!"
