Centuries ago, a force known as the Forbidden Arts entered Earth from the underworld, intent on destroying all of its rivals for power. It learned of a legend that the Swan Princess will bring an age of goodness and evil will lose its power in her presence, but she can be defeated by a magical stone. The Forbidden Arts corrupted the legend, making it appear that the Swan Princess will bring despair and destruction. A group of flying squirrels, the scullions, found the legend and over the years formed a community dedicated to finding and destroying the Swan Princess. When Odette, the Swan Princess, was finally born, the Forbidden Arts tried to use the wizard Rothbart to defeat her but failed.

In the present, Odette and Derek are being pressured by Uberta to have a child, and are unaware that they're being tracked by the scullions. The Forbidden Arts has joined forces with Mangler, the scullion leader, but is angered at their most recent failure. The Forbidden Arts leaves its cave to burn Odette alive, but it is blocked by Odette's power and has to return to the crystal in its cave to recover. A nearby house catches fire instead, killing the father of a young girl, Alise. Odette and Derek bring Alise to the castle, and Odette feels a kinship with her because they both lost their fathers tragically. Alise refuses to speak despite everyone in the castle working together to cheer her up. Alise grows close with Odette and Derek, who decide to adopt her as she has no relatives.

The scullions attack Uberta's castle, kidnapping Alise to lure Odette and Derek away, and locking everyone else in the cellar. Odette and Derek avoid the scullions' traps but Derek is poisoned by Mangler's blowdart. A friendly scullion, whom Odette names Scully, cures Derek and explains about the fake Swan Princess legend and the Forbidden Arts, and reveals that he has been keeping the magical stone safe. The group go to rescue Alise.

While Derek acts as a distraction, Scully sneaks into the scullion village and finds Alise in the Forbidden Arts' cave, but he is unable to rescue her. When the scullions are about to execute Derek, Odette intervenes and explains that all she wants is for her loved ones to be safe. Scully tells the scullions that the legend is a lie and the true evil is the Forbidden Arts. Mangler shoots a poison dart at Odette, which is blocked by Jojo, one of the scullions. Odette cures him with an antidote prepared by Scully, and the tablet with the corrupted prophecy reveals the true prophecy about the Swan Princess.

At the castle, Uberta and Rogers are about to be punished by the scullions for protecting the Swan Princess, and declare their feelings for each other. Jojo and the other scullions arrive with the real prophecy tablet, proving Odette to be good, and they release Uberta and the captives. The scullion army works together with Derek, Puffin, Jean-Bob and Speed to protect the magical stone, but the Forbidden Arts manages to obtain it, gaining its power.

Odette and Scully enter the Forbidden Arts' cave to rescue Alise. Odette is unable to break the prison, but Alise finally speaks, telling Odette to destroy the Forbidden Arts' crystal. Odette tries to, but is stopped by the Forbidden Arts, who is ready to destroy her. Scully jumps onto the crystal, sacrificing himself to destroy the Forbidden Arts. In the ensuing explosion Alise is freed from her prison unharmed, and she calls out to Odette: "Mommy".

The film ends with everyone celebrating the presentation of Princess Alise to the kingdom.