On the sun-drenched and sand-bitten planet of Tatooine, a nine year-old slave boy, Anakin Skywalker, dreams of the future when he and his mother, Shmi, will be free of the yoke of slavery. As only a nine year-old can, he also dreams what would seem to an adult to be unattainable, impossible dreams. He looks up at the sky and imagines himself grown up, a pilot who will be flying battle cruisers and fighters.

Adults like his owner, Watto, a Toydarian merchant with a lumpy body and constantly beating wings, could not hope to know what Anakin knows - that he is special in an extraordinary way that even he does not fully understand. He senses things that others can not, he knows that threats are present even when he can not see them, and he is gifted at building and repairing technically complex machines like protocol droids and pod racers. After all, doesn't Watto insist on entering Anakin and his pod racer in the regular races, in spite of fact that no human of any age has ever been able to win one? And hasn't Anakin been successful in hiding the fact that he's building his own pod racer, from scrap parts and components bartered from a myriad of sources? Someday soon, when he needs it, it will be completed and ready.

Still, he's a slave, and on Tatooine, slaves aren't able to escape. They each have an explosive tracer embedded in a secret location somewhere in their body tissues. Try to remove it, or try to run away, and the device will detonate and turn the slave into Bantha fodder. Of course, Anakin is too shrewd ever to attempt such a foolish strategy. He's wise far beyond his nine years, he's wily and cunning, and therefore he's content to bide his time until all his special gifts can be put to use to fulfill his dreams of a new life for him and his mother.

Meanwhile, at the same edge of this galaxy, two Jedi knights aboard a small cruiser bearing the insignia of the Republic are approaching the planet of Naboo, whose queen, Amidala, young and supposedly untried as a ruler, has just been newly elected. It's an especially perilous time to succeed to the throne, since Naboo is locked in a blockade deployed by the powerful Trade Federation, headed by the Neimoidian Viceroy Nute Gunray. As they approach the blockade, Qui-Gon speculates about the reason why Neimoidians, normally non-combatant traders, should suddenly appear with a Federation battle fleet and an army of droids to challenge the Republic.

The Republic and its Senate are the ruling body of this galaxy, and the independently constituted Trade Federation has complained about trade route taxes levied by the Republic, but has never taken such a defiant action as blockading a planet. Master Jedi Qui-Gon Jinn is puzzled by this warlike behavior on the part of the Trade Federation, especially over a relatively insignificant planet such as Naboo. His apprentice, Obi-Wan, is disturbed by the fact that he senses a malevolent force, not on the planet, but elsewhere, far away.

Qui-Gon and Obi-Wan, are part of an ancient order, whose members serve the Republic, not in an aggressive capacity, but as respected and powerful peacemakers who are called upon in life-threatening situations. The discipline of the Jedi has evolved over centuries, and has centered around their attachment to, and understanding of The Force, which affords them extraordinary power, but only if their lives are dedicated to serving the community, guaranteeing equal justice throughout the galaxy.

The Neimoidian Viceroy, Nute Gunray, is frantic when he learns that two Jedi have boarded his ship as ambassadors. He sends a droid to meet the Jedi, then via hologram, he contacts the mastermind behind the blockade, Darth Sidious, a disciple of the evil cult called the Sith, who had supposedly been exterminated long ago.

Sidious orders Gunray to blow up the Republic Cruiser and kill the two Jedi knights. Gunray dispatches destroyer droids to accomplish this task and then orders his fleet of landing ships and battalions of droids to attack the planet. What he does not realize is that the two Jedi have escaped his assassination squad and hitched a ride with invasion troops down to the planet, where they surface in the swamp of the Gungan race. The Gungans are strange amphibious creatures with rubbery bodies, long flat ears, and ducklike snouts. One of these creatures, a clumsy renegade named Jar Jar Binks, agrees to help the two Jedi to make their way to Queen Amidala's palace.

Unaware of the events unfolding on Naboo that will alter his life in unforeseen ways, Anakin Skywalker treks out into the desert of Tatooine to trade with a nomadic race called the Jawas. At this same moment, the two Jedi, guided by Jar Jar Binks, infiltrate Queen Amidala's palace, which has been occupied by Nute Gunray and his troops. Qui-Gon orchestrates a brilliant escape from Naboo in one of the Nabooan cruisers, taking the Queen, her entourage, a crew, and Jar Jar, much to the distaste of Obi-Wan, who views Jar Jar as baggage. On the way through the blockade, the ship is damaged and is forced to land on Tatooine to seek repairs.

While Obi-Wan guards the ship, Qui-Gon, the droid R2-D2, Jar Jar, and a handmaiden, Padmy, journey to Anakin's nearby city, Mos Espa, seeking replacement parts for the Cruiser. They meet Anakin, whom Qui-Gon senses to be an extraordinary being, perhaps even Jedi material. Drawn to Padmy, in spite of the difference in their ages, and wanting to impress her, Anakin shows the little group his half-finished protocol droid, and the pod racer he has built and hidden. Then he leads the Jedi to Watto's shop, but Watto refuses to accept Republic credits in payment for the needed parts, and Qui-Gon, claiming to own a pod racer, makes a racing bet with Watto, but only if Anakin is supplied to pilot "Qui-Gon's" racer. If Anakin wins, then Watto supplies the needed parts and takes the winnings. If Anakin doesn't win, Watto gets Qui-Gon's Nabooan cruiser.

They agree on the deal, and a long exciting race ensues, which Anakin does win by a narrow margin, impressing Qui-Gon so much that he buys Anakin's freedom and takes him away.

As they approach their cruiser, they are confronted by a powerful Sith - Darth Maul, fearsome in appearance, and armed with a double-ended light saber. Qui-Gon battles Maul, to buy time for the cruiser to load and take off, but Maul is impressive, as well as stronger and younger, and Qui-Gon barely manages to escape him at the last minute, by catching on to the ship as it takes off. The cruiser makes its way to a city-planet, Coruscant, the capital of the Republic, where the Senate holds its sessions, and where the Jedi Temple stands, housing knights, apprentices, and the Jedi Council.

Once on Coruscant, Queen Amidala pursues her suit for justice with the Senators, and Qui-Gon pleads unsuccessfully with the Jedi Council to allow him to train Anakin as a Jedi. An election for Chancellor of the Republic is under way, and Senator Palpatine, who promises to restore Naboo to Amidala and fight corruption in the Senate, is the lead candidate. Queen Amidala, not content with his promises, decides to return to Naboo, along with Qui-Gon, Obi-Wan, Jar Jar, and Anakin.

During the testing of Anakin, it has been discovered that he possesses an extraordinarily high level of midi-chlorians, microscopic life forms that reside within the cells of all living beings and promote communication between their hosts and The Force. Qui-Gon assures Anakin that, with time and training, he will understand all these things. As they speak, the transports arrive, and they are off to Naboo. On the ship Anakin seeks out a less spiritual type of learning. He makes friends with the pilot, and persuades him to explain the workings of the controls on the pilot's console.

While they are on the transport, Amidala explains to the others what her plan is. She has learned from Jar Jar that the Gungans have a secret army, well equipped and ready to do battle. She intends to land in the swamps, raise an army and retake Naboo. When they land, she persuades the Gungans to join forces with them, but with a slightly altered plan. When the Federation brings out its forces against the Gungans, she and a small group of fighters will battle their way into the palace and take control.

When they land, they contact the Gungan leader, and Queen Amidala in her headdress, with Padmy and Anakin beside her, attempts to negotiate an alliance. As the negotiations falter, Padmy steps out in front of the queen, reveals that she is the queen, and that her handmaiden, Saby has been standing in for her. The plan proceeds as originally planned., The Gungans raise their force-fields, engaging the droid army that is controlled by a single cruiser orbiting the planet. Qui-Gon, Obi-Wan, Jar Jar and Anakin, Amidala and her pilots and troops infiltrate the city and work their way to the palace.

As they take over the main hangar, Anakin, along with R2D2, is ordered to stay in the cockpit of one of the fighters, while Amidala leads her group to the throne room and while starships scramble and head off toward the Federation Battleship. At that moment Darth Maul appears, forcing Qui-Gon and Obi-Wan to fight him. From his vantage point in the star fighter, Anakin sees that Amidala and her group are about to be attacked by three lethal destroyer droids. Assisted by R2D2, he starts up the star fighter and obliterates the droids, allowing Amidala to proceed.

As the two Jedi Knights pursue Darth Maul into the power station, Anakin, unfamiliar with the controls of the star fighter, causes it to lift off under automatic pilot and pursue the other fighters toward the Federation Cruiser. In the corridor outside the throne room, Amidala surrenders to a number of droid pursuers and is taken inside to confront Nute Gunray, but she catches him off guard, gets a blaster hidden in the arm of the throne, and barricades the whole group in the throne room so that Gunray will be forced to sign the peace treaty.

Meanwhile, Anakin struggles to control the alien star fighter he's flying. In an attempt to elude pursuers, he streaks along the side of the Federation Battleship, but finds the only way to elude them is to fly right into the ship's main hangar. In the power station Darth Maul and Qui-Gon have fought their way into the melting pit, leaving Obi-Wan behind, blocked by a laser field. Tiring, Qui-Gon makes a slip, and Darth Maul wounds him fatally. Obi-Wan, finally released from the laser field, mounts a fierce attack on Darth Maul which succeeds in driving him back, but strength and experience allow the Sith to smash Obi-Wan's light saber, and push him over the edge toward the melting pit. At the last minute Obi-Wan manages grab hold and stay his fall. Then he wills himself to get in touch with The Force, to calm himself, and with a supreme effort somersaults backward away from the pit, grabs Qui-Gon's light saber and cuts Darth Maul through the chest with a killing slash that catapults the Sith over the edge and into the pit.

In the battleship's hanger, Anakin, beset by droids, seems to sense something no more than a shadow, and by instinct he fires two torpedoes at it, then wheels and escapes through the hangar opening. Once outside, he has barely time to look back, when the communication channel crackles into life with excited voices. Anakin looks in time to see the Federation ship pummeled and dismembered by explosions from inside.

Back on the ground, the Gungans are almost being overrun when all the droids suddenly freeze, deprived of control from the orbiting ship. And in the Naboo power station, Obi-Wan runs to his master, finds Qui-Gon near death, but able to talk. "Promise me," Qui-Gon says, "you will train the boy."

Three days later, sovereignty is fully returned to Naboo, the Neimoidians have been shipped to prison in Coruscant to await trial, and Obi-Wan has been made a full knight in the order of the Jedi. The Jedi Council has seen fit to reverse their decision to train Anakin Skywalker, and has ordered Obi-Wan to undertake the task. Only one Jedi, Yoda, dissents. He senses something disturbed and unsettled in the boy, and he warns Obi-Wan to be on guard against it. Talk then turns to the death of Darth Maul, and Yoda says, "Always two there are. No more, no less. A master and an apprentice." And another Jedi asks, "Then which one was destroyed, do you think - the master or the apprentice?" This leaves the unspoken thought that if the Master has survived, he will seek a new apprentice.