The Galactic Republic is in a period of decline, with its bureaucracy bloated and corrupt and its economy deteriorating. In response to a taxation on trade routes, the greedy Trade Federation organizes a blockade of battleships around the planet of Naboo. Hoping to resolve the matter, the Supreme Chancellor dispatches two Jedi, Qui-Gon Jinn, and his Jedi apprentice Obi-Wan Kenobi, to negotiate with Trade Federation Viceroy Nute Gunray. Unbeknown to them, the Trade Federation has become in league with the evil Sith Lord Darth Sidious, who orders them to kill the Jedi and invade Naboo with an army of battle droids. Narrowly evading death, the two Jedi stow aboard landing craft and escape to Naboo. There Qui-Gon saves local Gungan outcast Jar Jar Binks from being trampled by a Federation tank. Indebted to the Jedi, Jar Jar leads them to the underwater Gungan city of Otoh Gunga, where the Jedi unsuccessfully attempt to persuade the Gungans to help the people of Naboo, though they are able to obtain a transport to reach the Capital city of Theed on the surface.

Queen Amidala of Naboo is captured by the Federation army, but is rescued by the Jedi. The Queen escapes Naboo with the Jedi on her personal starship, which is damaged on its way through the blockade surrounding the planet, forcing them to land on the nearby desert planetTatooine for repairs. Qui-Gon ventures into the settlement of Mos Espa with Jar Jar and R2-D2 to a junk shop to purchase a new hyperdrive generator. In fulfillment of the Queen's wishes, they allow one of her handmaids, Padmé to journey along with them. There they meet a young slave child named Anakin Skywalker. After spending time with Anakin, his mother Shmi Skywalker, and their droid C-3PO, Qui-Gon senses a strong presence of the Force within him, and suspects he may be the Chosen One who will bring balance to the Force. Qui-Gon makes a bet with Anakin's owner, Watto, to enter him in a podracing tournament, and that if Anakin wins, he will be freed. Anakin manages to win the race and joins the group to be trained as a Jedi, but he is forced to leave his mother behind because Qui-Gon was unable to arrange for her release as well. Before they leave, they are attacked by Darth Sidious' apprentice, Darth Maul, who was dispatched to capture the Queen. After a brief fight, they manage to escape.

The Jedi escort the Queen to the Republic capital planet of Coruscant so she can plead her people's case to the Galactic Senate. Qui-Gon, meanwhile, attempts to persuade the Jedi Council to train Anakin as a Jedi, but they refuse as Anakin is too old and has too many attachments, which would risk him turning to the dark side of the Force. Within the Senate, Senator Palpatine of Naboo convinces the Queen to move for a vote of no confidence in the Supreme Chancellor so they can vote for a new, stronger Chancellor who will help end the conflict. She indeed pushes such a vote, but grows frustrated with the lack of action by the Senate, ultimately deciding to return to Naboo with the Jedi.

Qui-Gon and Obi-Wan duel against Darth Maul.

Back on Naboo, Padmé reveals herself to be Queen Amidala, the other "Queen" having been a decoy for her own protection. The Queen convinces the Gungan people to form an alliance against the Trade Federation. While the inept Jar Jar leads his people in a battle against the droid army and the Queen moves in to capture Viceroy Gunray in Theed, Anakin commandeers a vacant starfighter and joins the dogfight against the Federation droid control ship in space, using his skills with the Force to destroy it, which deactivates the entire droid army. The Jedi, meanwhile, encounter Darth Maul once more and engage him in a two-on-one lightsaber duel. Qui-Gon is killed in the battle, but Obi-Wan manages to kill the Sith apprentice. Senator Palpatine is elected as the new Supreme Chancellor, the Federation Viceroy is sent to stand trial for his crimes, Obi-Wan is bestowed the rank of Jedi Knight, and the Jedi Council reluctantly allows Anakin to become Obi-Wan's apprentice. At a grand ceremony, Queen Amidala presents a gift of appreciation and friendship to the Gungan people.