During a normal day at Monster High, Frankie, Draculaura and Clawdeen are practising for a dance recital in the Clawditorium, and not doing very well thanks to Toralei's rather bad tutelage. Lagoona watches them practice, and at Toralei's request, offers to set up a party after the recital, but declines the offer to dance with her friends. After they leave, Lagoona steps on stage and dances superbly by herself. She then realizes Gil is watching her, and utterly freezes up and faints. Gil asks why she doesn't dance with the rest of the ghouls. Lagoona explains she used to dance back in her home at the Great Scarrier Reef, but won't dance any more. She leaves, unaware Toralei had seen her performance.
The dance recital takes place, and the students are not impressed by the ghoul's terrible dancing. Toralei spots Lagoona dancing along behind the backstage curtains, and not willing to be humiliated alone, pulls back the curtains. Lagoona freezes up on seeing everyone watching her, and ends up getting tangled and strung up in the stage rigging.
The next day, Lagoona is horrified to discover a video of her mishap has gone viral and created hundreds of meme pictures. Enraged, she decides to uninvite Toralei from the party. Soon the party, which is next to the outdoor pool, is in full swing. Toralei storms in, demanding to know why she wasn't invited. Lagoona calls her out for embarrassing her, and the two start yelling at each other, while Ghoulia notices the water in the pool seems to be turning into a whirlpool. Toralei accidentally falls into the pool, and Lagoona dives in to rescue her. Draculaura, Frankie, Clawdeen and Gil attempt to pull them out, but all of them end up sucked under the water and vanish.
When the group comes to, they discover not only are they underwater, but they have all transformed into half-fish creatures. (Much to Toralei's horror) They are then greeted, rather dramatically, by Posea Reef, the daughter of Poseidon. Posea explains that she cares for a special garden, where each plant represents a sea creature. She noticed that Lagoona's plant was wilting, and summoned Lagoona to the ocean to help her (and bought the others down by accident) She tells Lagoona that in order to go back home, she must face her greatest fear, and disappears.
The groups decide to swim and find some help, getting used to their new forms as they travel. After a long distance, they find themselves inside an underwater amphitheater, where they witness several sea creatures performing a dance. Lagoona recognizes one of them - A squid ghoul named Kala. Kala sees them and drags Lagoona on the stage, where she freezes up again.
Lagoona explains that she and Kala used to be friends when they were children, and once competed in a dance competition together. But after Lagoona kept cheering abut how her entire family had appeared to cheer her own, Kala suddenly started acting nastily toward her, and deliberately tripped her up on stage. She was laughed off stage, and has had stage fright ever since.
The gang head to the city within the Scarrier Reef, where they meet Lagoona's father Wade, her little sister Kelpie, and her brothers Dewey, Tadpole and Squirt. Wade welcomes them to stay at his place. Kala, along with Peri and Pearl Serpentine, watch Lagoona from afar and begin plotting to embarrass her again. While Pearl is happy to go along with Kala, Peri feels they're being too mean, resulting in the two sisters fighting.
The next day, Wade warns the ghouls that a giant creature known as the Kraken has been sighted near the town, which the locals are all terrified of. While Gil entertains Lagoona's brothers, the ghouls decide to play miniature golf and figure out what Lagoona needs to do. They run into Kala, who challenges Lagoona to compete against her in a dance competition tomorrow. Lagoona is reluctant, but when her sister begs her to take part, she can't refuse. That night, while the ghouls practice for the competition, Lagoona is met by Peri and a sleeping Pearl. Peri tells her that she heard a legend about the Kraken: If she looks the Kraken in the eye, she will never feel fear again. Lagoona thanks her for the help. But when she leaves, Pearl wakes up and reveals the 'legend' is all a trick..
Lagoona announces she's going to see the Kraken, and despite their protests, the ghouls all agree to go with her. They swim down to the bottom of a deep sea trench, and traverse the tunnels until they reach a large cave. Surprisingly, they discover a small living quarters, and several drawings on the wall... Suddenly, a giantic creature with tentacles appears and chases after them. The ghouls barely make their escape.
Finally feeling ready to take to the stage, Lagoona and the ghouls head to the competition. But Kala reveals that there is no legend about seeing the Kraken's eye. She just made it up to trick her. Lagoona is distraught, but the ghouls assure her that after their narrow escape, dancing on stage shouldn't be a problem.
The ghouls take to the stage and begin their dance. All goes well, but at the climax of the act, Lagoona sees the audience and faints again. Kala laughs at her and the audience starts joining in, but Gil and the ghouls rush to her defence. They proclaim that Lagoona tried her hardest to return to the stage, even going as far as facing the Kraken, and that people should encourage her for the effort instead of mocking her. The crowd begin cheering for Lagoona, even as Kala and her friends take to the stage. Enraged, Kala lets out a ear-piercing scream... and the Kraken suddenly appears. Kala rides on it's head as it smashes through the wall in pursuit of Lagoona, leaving Peri and Pearl to fend for themselves.
Lagoona and her friends swim back to Posea's garden, and beg her to return them to Monster High. Posea agrees, but tells Lagoona that she still must face her fear. She summons a whirlpool and sends the gang through. They emerge back at Monster High, restored to their original selves.. but then Kala and the Kraken emerge from the pool. As the Kraken begins smashing the school, Lagoona asks her friends and the other students to distract the Kraken while she climbs onto its head to confront Kala.
Lagoona scales the Kraken while its distracted and faces Kala, realizing that all along it was Kala and her bullying that was her greatest fear. Kala cries that she was the one who was bullied, that everyone is always mocking her for her appearance. Lagoona tells her that Monster High isn't like that, and accepts everyone despite their flaws. Hearing this, Kala tells the Kraken to stop... and reveals it is actually her father!
As the Kraken helps repair the school, Kala explains that she hated how her father was always considered evil by the townsfolk, and eventually felt so ashamed she decided to live away from him. She realises she was wrong for not telling everyone about how nice her father is, and for bullying Lagoona. Lagoona forgives her.
With the school repaired, everyone celebrates with a party by the pool, with Kala, Peri and Pearl, and the Kraken joining in the fun. Back at the Great Scarrier Reef, Posea is delighted to see Lagoona's - and Kala's - plants are finally back to full health.
- The kraken's immunity to Deuce's stare is a mythology gag. Some interpretations of Medusa'a story claim it's her immense ugliness that turns people to stone. It then follows that anyone uglier, such as the kraken, would be able to turn the gorgon's gaze back on them.
- The last meme Lagoona is faced with is an adaptation of the poster of the 1975 movie Jaws.
- When Lagoona and her friends are preparing for their performance in the dressing room, the song playing is "Mermaid Party" from "Barbie: The Pearl Princess".
- When Toralei looks in the attic, the mirror's image of the Evil Queen from Ever After High briefly appears.
- In the talent show dressing room of the stadium, there's a poster of Apple White, Raven Queen and Madeline Hatter from Ever After High on the wall in the background.
- How can Gil wipe the fog off his helmet if it is on the inside?
- After the post-credits scene, there is a note dedicating this special to Tori, a Make-A-Wish Foundation child who got to design an exclusive doll and provide two lines in the special. One is the "Bravery comes from the heart" line during the dedication and the other is "Hey, I really like this song" during the first party scene.
- The DVD contains an edited version of the Way Too Wonderland special from Ever After High.