After a blissful honeymoon, Shrek (Mike Myers) and Fiona (Cameron Diaz) return home to find an enticing invitation to a royal ball hosted by Fiona's parents to celebrate their union. Despite Fiona's excitement, Shrek is hesitant to attend. Along with Donkey (Eddie Murphy), they venture to the grand kingdom of Far Far Away, only to be met with shock from Fiona's parents, King Harold and Queen Lillian, voiced by John Cleese and Julie Andrews respectively. Their surprise stems from Fiona's unanticipated choice of husband as well as her new appearance.
A clash of egos occurs during their first family dinner, leading to a heated argument between Shrek and Harold regarding their differing views on raising a family. Disgusted by the confrontation, Fiona retreats to her room, where she encounters her Fairy Godmother (voiced by Jennifer Saunders), who is equally taken aback by Fiona's new form. Shrek, grappling with insecurities about his relationship, discovers Fiona's childhood diary, which reveals her past admiration for Prince Charming (voiced by Rupert Everett).
Meanwhile, the Fairy Godmother and Charming confront King Harold, pressuring him to uphold a promise that Charming would have a chance to marry Fiona. The stakes rise as Harold sets a trap under the guise of a hunting trip, with intentions to eliminate Shrek and Donkey. To Shrek's dismay, a sly cat named Puss in Boots (voiced by Antonio Banderas) joins their adventure after initially being sent to take them down.
Faced with Fiona's distress over Shrek's departure, King Harold advises her to consider what she truly desires, suggesting she think beyond his wishes. Although Puss has been initially sent to defeat Shrek, he seeks redemption and wishes to assist. Shrek soon decides to confront the Fairy Godmother for help, even as she tells him, "Ogres don't get 'happily ever after'."
In a daring heist, Shrek and his friends infiltrate the Fairy Godmother's potion factory, stealing a "Happily Ever After" potion in hopes of rekindling Fiona's love. As they wait out a rainstorm, the potion seemingly fails, leading to an unforeseen transformation—Shrek becomes a dashing human and Donkey morphs into a majestic stallion. But, the changes must be solidified by a kiss from Fiona before the clock strikes midnight.
In a twist, Fiona also regains her human form, but the Fairy Godmother dispatches Charming to the castle to pose as Shrek and woo Fiona. Although King Harold sees through Charming's act, his silence fuels the confusion. Shrek, believing Fiona might prefer Charming, decides to leave, heartbroken.
As the stakes rise, the Fairy Godmother employs underhanded tactics, including using love potions, to manipulate situations in her favor. However, both Shrek and his companions overhear the Fairy God's scheming plans. In a raucous execution that mirrors a cop show, Shrek, Donkey, and Puss are imprisoned, but friends rally to stage an elaborate rescue involving a towering gingerbread man named Mongo. Bear witness to Shrek's arrival just in time to see Fiona knock Charming out after he attempted to forcibly kiss her, causing chaos.
Ultimately, when King Harold discovers the Fairy Godmother's plans, he makes a selfless decision to protect Shrek and Fiona, leading to an explosive confrontation. As the Fairy Godmother's schemes unravel, Harold confesses his true feelings for Fiona, granting his blessing to Shrek and Fiona’s marriage. As the magical effects wear off, Shrek reassures Fiona that their love is enough, embracing their true selves.
The festivities resume with joyous celebrations as Donkey and Puss serenade the crowd. In a delightful post-credits scene, Shrek, Fiona, and their loyal friend Donkey enjoy the remains of the party, as Dragon arrives with their adorable offspring, the "Dronkeys," bringing their adventure full circle.
