Three years ago “Shrek” grossed $480 million worldwide and scored DreamWorks the first-ever animated-movie Oscar by lampooning the fairy-tale formula that had built the Magic Kingdom. “Disney has really been the leader, in every respect, for 75 years,” says Jeffrey Katzenberg, who shepherded “The Lion King” at Disney, then founded DreamWorks with Steven Spielberg and David Geffen 10 years ago. “We needed to find our own path, a sensibility that’s a little subversive. ‘Shrek’ defined us.” And changed the industry. Suddenly, the Little Mermaid was all wet, and Sleeping Beauty looked very, very tired. Since 2001, only one traditional animated film, Disney’s “Lilo & Stitch,” has grossed more than $100 million domestically. Yes, Pixar has electrified the genre with the 3-D “Toy Story” and “Finding Nemo.” But if old-fashioned animation is dead, “Shrek” certainly helped kill it, and the sequel’s about to throw more dirt on the coffin.

In “Shrek 2,” which opens May 21, the unjolly green giant (Mike Myers) finally meets Princess Fiona’s regal parents. It isn’t pretty. Before long, Shrek and Fiona (Cameron Diaz) are spatting, the Fairy Godmother is blackmailing the king–and the king’s hiring an assassin to take Shrek out. And it’s here that the movie reaches cruising altitude. The killer, Puss-In-Boots, is so hilarious that he steals “Shrek 2” out from under Shrek. “It was very easy to convince me to do the movie, because if somebody gives me the opportunity to laugh at myself, I’m right there,” says Antonio Banderas, who gives the pint-size kitty a lion-size ego. “He’s just so arrogant, even though he can be destroyed in a second.”

Fortunately, Shrek thinks Puss is cute, and lets him tag along, much to the irritation of Donkey (Eddie Murphy), who fears his sidekick status is in jeopardy. “To create jealousy and challenge that friendship seemed like the perfect thing to do,” says writer-director Andrew Adamson, who based Puss on his own tabby, Joshua. “Early on, Puss was this sort of upper-crust British character, but then the producer, Aron Warner, and I were at a party and one of his friends said, ‘How come you don’t have any Latin characters?’ " Despite his skill with a foil, Puss’s greatest weapon is a goopy-eyed, sad-kitty stare that disarms his attackers just long enough for him to destroy them. “He’s supposed to be this huge ultravillain, but because he’s a cat he has natural shortcomings,” says fellow director Conrad Vernon, who also provides the voice of the Gingerbread Man. “I just wanted him to have this one thing when all else failed.”

Speaking of which, all else has failed for DreamWorks animation since 2001. “Shrek” generated almost $1 billion in profits for the studio (thanks to massive video sales), but the solemn “Spirit: Stallion of the Cimarron,” underperformed, and last year’s “Sinbad” flopped, despite the A-list voices of Brad Pitt and Catherine Zeta-Jones. Both films were in production before “Shrek” was released. “In our hearts we knew that they were our past, not our future,” Katzenberg says. “They were closing chapters.” “Shrek 2” should put DreamWorks back on its game. Although it’s impossible to compete with the original, the sequel delivers on its promise, and ups the ante with a more adult story line (e.g., in-law trouble, marital disappointment) without sacrificing the hip cultural references that made the first one such a blast. The finale at a grand ball features a paparazzi-flanked red carpet, with Joan Rivers (as herself) dishing on the fashion foibles of the fairy-tale elite. “I did it because I heard DreamWorks had the best buffet lunches in town,” says Rivers. “This is not a joke: it’s better than what I get at my daughter’s house! I came back for a second session and tried to bring three friends.” Although her favorite line–“Thumbelina, that tramp!”–didn’t make the final cut, the experience was “just fabulous,” she says. Pause. “But I want a bigger part next time.”

If she gets it, she’ll likely make a lot more money. Myers, Murphy and Diaz got $10 million each to reprise their characters, which accounted for almost half the film’s modest $70 million budget. With production costs on computer-animated films dropping and grosses for family films skyrocketing, DreamWorks has helped transform animated movies from kid hits into global blockbusters. More important, though, these new animated films have consistently been among the best movies around, and they have achieved what Disney, for all its historic success, never could: they’ve actually made cartoons cool. That means the dive bar in the forest is going to get a lot more crowded, and fogies like Captain Hook may be unemployed–and playing the blues–unhappily ever after.