Sandy Ricks (Elijah Wood) is sent off for the summer to stay with his uncle Porter (Paul Hogan) in the seaside town of Coral Key. While out on Porter's fishing trawler, the two meet Porter's arch enemy, Dirk Moran (Jonathan Banks). Nearby, a pod of dolphins is frolicking near Dirk's boat. As a big game fisherman, Dirk hates just about every other fish eating animal on earth. He shoots at the dolphins because they are eating the fish that he wanted his charter customers to catch. Many escape, but Flipper is separated from the main pod.
One night, Sandy, who plans to return to his home in Chicago, sets off for the docks. While there, he kicks a Pepsi can into the water. Flipper tosses it back. Sandy repeats this trick several times and begins to feel a connection with the dolphin. Then his ferry arrives. Porter wakes up to find his nephew missing; a neighbor tells him what happened. Porter catches up with the ferry and brings Sandy back to Coral Key. The next morning, they find the devastation left by a hurricane. Porter goes for supplies, leaving Sandy to fix what he can. Sandy is distracted from his work by Flipper. Flipper then meets a girl named Kim (Jessica Wesson), who tells Sandy that Flipper is lucky to have survived on his own this long, especially with a fearsome hammerhead shark named Scar in the area, who has been terrorizing Coral Key for a long time. While playing, Kim explains that he'll need fish. Sandy starts his own amusement park called the Flipper Show and charges one fish for admission.
Porter arrives home and is furious when he finds out that Sandy has been playing with the dolphin rather than doing what he was meant to, and decides to teach him a lesson by letting him smoke cigars until he throws up. Shortly after this, the sheriff of Coral Key Buck Cowman (Isaac Hayes) arrives and explains they cannot keep the dolphin. The next day, Flipper is caught by Dirk Moran's men. Porter cuts the rope to release the net. Flipper escapes, but his subsequent and prolonged absence from the area causes Sandy and Kim to set out after him in a dinghy. The two discover a group of people dumping toxic waste into the sea. Unfortunately, the people are too far away to identify.
The next morning, Kim is on the beach when Pete, Porter's pet brown pelican, comes running up to her, almost as if asking her to follow him. Pete leads Kim to a dying Flipper. Porter's friend, Cathy (Chelsea Field) and her untalkative son, Marvin (Jason Fuchs) mix up a special medicine, take a blood sample, and release Flipper into the wild. Cathy runs some tests on the blood sample and concludes that Flipper was poisoned by toxic waste. But the sheriff, upon being informed, tells her that that is not enough to prove that there is toxic waste out there. Porter and Cathy realize that they must solve this mystery themselves. They set out, along with Kim, Sandy and Marvin.
Cathy hopes to use Flipper's gift of echolocation and a special camera she attaches to his head to help them find the toxic waste. Their plan works, and Porter heads back to alert the sheriff. Sandy, who lags behind to say goodbye to Flipper, barely survives an encounter with Dirk Moran's boat, which dismantles the dinghy. He sees a dorsal fin and thinks it is Flipper (who had previously enjoyed pretending to be a shark). It is actually a hungry Scar, whose food supplies have been depleted by the toxic waste, forcing him to hunt human prey. Flipper appears and starts nose butting Scar in the gills, but the shark is stronger than Flipper. Flipper's pod comes to his aid and, through strength of arms, the dolphins drive Scar away from Sandy. Sandy makes it to Dirk Moran's boat, where the man reveals that he was the one who dumped the toxic waste barrels into the sea. Dirk is just about to kill Sandy when Flipper jumps up and with his tail whacks Dirk right into the sea. The sheriff soon arrives to arrest Dirk. Sandy says one last farewell to Flipper before he swims away with his pod, then leaves Coral Key with his mother and little sister. On the ferry home, Flipper and his pod come to see Sandy off.
