The novel is set in a version of Portsmouth, New Hampshire. In the beginning of the book, Maxwell Kane is a young boy with low self-esteem. He lives with his grandfather, Grim, and grandmother, Gram. Max thinks of himself as a butthead. People are afraid of him because he looks like his father, Kenneth "Killer" Kane, a convicted murderer. Max sets the stage for the story by reminiscing about his time in daycare, when he had met a boy named Kevin, or Freak. Kevin has Morquio syndrome, wears leg braces and uses crutches, and thinks of himself as a robot and is bullied by many bigger kids due to his short height. However, Max likes Kevin and thinks the crutches and leg braces are neat.
Many years later, when Max is in middle school, he finds out that Freak and his mother, Gwen (referred to as "The Fair Gwen") are moving into the house next door. When Max initially approaches Freak, Freak acts with hostility. However, some time later, Max saves Kevin's toy ornithopter from a tree and they start to become friends. On the Fourth of July, they go to see the fireworks show and are attacked by an older boy, Tony "Blade" D. and his gang but avoid any mental or physical conflict. After the show, Blade chases the two with his gang after Freak calls him a cretin. Despite Max's lack of knowledge and disability, he escapes by acting on Freak's orders, but the two are driven into a muddy millpond. Freak gets the attention of a nearby police car, who drives off Blade's gang and takes the boys home. After this incident, Kevin starts riding on Max's shoulders regularly. They begin to call themselves "Freak the Mighty". They go on adventures such as going to the hospital which Freak claims has a secret department called the "Bionics Department" which has had his brain CAT scanned to be fitted into a bionic body.
On one adventure they find a woman's purse in the storm drain. They return it to the woman who is named Loretta Lee. She is the wife of Iggy Lee, leader of the Panheads, a motorcycle gang who "struck fear in everyone, even the cops", as Max puts it. Iggy says that the two of them once knew Max's father. They consider "having some fun" with the boys but don't because they are afraid that Max's father will get parole even though he's serving a life sentence. They also reveal that Kevin's father left once he heard that his son had a birth defect.
Freak has an emergency at school and is taken to the hospital. Later, Grim reveals to Max that his father has been released from prison on parole. Throughout the story, it has been gradually revealed that Max's father killed his mother by strangling her, and that Grim and Gram dislike his father and are afraid of Max ending up like him. Grim threatens to buy a gun for the family's protection. Max is shocked and scared by the news of his father's parole. On Christmas Eve, Max is woken up by his father, Killer Kane, who has come to take him to train him to be his assistant. After Max is kidnapped by his father, the two walk to Iggy Lee's apartment in the Testaments.
Killer Kane is even bigger than Max and acts in a very threatening, intimidating manner towards everyone, including his son, whom he keeps tied up on a small chair. Killer Kane swears that he did not murder Max's mother and calls himself "a man of God". On Christmas morning he leaves Max alone, tied up in a room in an old abandoned apartment. Loretta, shocked that Kane would do something like that to his own child, tries to help him escape. Killer Kane catches her and starts to strangle her. Max tries to get up and rips off the rope to which the old boiler has been attached. Max attempts to stop him and reveals that he witnessed his father kill his mother in the same fashion. Kane gives up on training Max to be his obedient assistant and tries to murder him by strangling him, like he did to Max's mother, but Freak arrives just in time and saves Max by squirting Kane with a squirt gun in the eye which he claims is filled with sulfuric acid when in fact, as Freak reveals later, it is filled with soap, vinegar, and curry powder. The police are waiting outside, and Killer Kane is taken back to prison and has to serve his original time plus ten years. Killer Kane pleads guilty.
After having a seizure on his birthday, Freak is admitted into the hospital, where he gives Max a blank book, telling him to write the story of Freak the Mighty in it. Max returns to the hospital the next day to find that Freak died because his heart became too big for his body. Dr. Spivak, Kevin's doctor, reveals that Freak knew he was going to have a very short life, but he told Max he was going to get a bionic body because it would give Max hope. The Fair Gwen moves away, with a new man she is in love with, and Max misses Freak's funeral, staying in his room, the "down under" for months. Not even Grim or Gram can get him out, until Grim orders Max to return to school. One day, Max sees Loretta, who tells him "Doing nothing's a drag, kid", so Max writes all of the adventures he and Freak had, in honor of his best friend.