Sandy Ricks [Luke Halpin] is asked to vacate his home to make way for a new highway but runs away from home to keep his pet dolphin Flipper from being taken away. His dad, Porter [Brian Kelly], widowed since the prior film, returns from park ranger school to search for Sandy but doesn’t realize his son has fled in their skiff motorboat to the Bahamas. On the way, Sandy runs out of food, water, and gas. Flipper helps by towing the skiff to a seemingly deserted island.
Just as Sandy is establishing himself on the island, he witnesses the holidaying British family of Sir Halsey Hopewell [Tom Helmore] being taken hostage by recently escaped convicts. The mother, Julia [Helen Cherry], and two daughters Gwen [Francesca Annis] and Penny [Pamela Franklin] are forced into a small boat and told to row to the nearby island where Sandy is hiding. Mrs. Hopewell, Gwen, and Penny struggle to find food to survive; Sandy, with the help of Flipper, finds ways to get fish, matches, and other items to the Hopewells without being discovered. This lasts until Sandy accidentally meets and then befriends the younger of the two daughters, Penny. Sandy and Penny form an innocent romantic attachment as Sandy shows her around his new island paradise and secretly helps her behind her sister's and mother's backs.
Sandy shows Penny how to cut down and husk coconuts, light fires, and weave fish nets. The happy friendship seemingly comes to an end when Sandy, afraid that rescuers of the Hopewells will discover him and Flipper and make them return to the Keys and be separated, sends Flipper to douse the Hopewells' rescue fire. Penny is angry and tells Sandy to stay away. Sandy tries to make up by placing fish, cans of food, a can opener, and a flashlight into their nets.
Soon after, the convicts come back for the mother and daughters, and Mr. Hopewell is made to radio the nearest Coast Guard station in Puerto Rico that he and his family are hostages. Sandy and Flipper make a plan to rescue them from the convicts. Sandy distracts the convicts by releasing much-needed cans of food and luring one of the convicts into a row boat to retrieve the cans; Flipper tips the boat over and rams the convict in the stomach, knocking him out. Sandy and Flipper grab him and leave him in a hidden cave. Through various ruses, Sandy manages to get the remaining two convicts into the water. The second one is captured in the same way as the first, and the leader fights hard with a knife to fend off Flipper. Though he is overcome and Sandy is able to tie him to the boat hull, the leader manages to stab Flipper near his tail in a frantic escape attempt, and Flipper is washed up bleeding and injured on the beach. Sandy sobs as he holds his injured friend. Sir Halsey radios that they are safe and calls for a vet. Flipper is nursed back to health at the Miami Seaquarium, where Porter has returned to announce his assignment as a park ranger to the Coral Key Marine Preserve and tells Sandy that Flipper’s new home will be there once he recovers.
