The opening crawl reveals: Turmoil has engulfed the Galactic Republic. The taxation of trade routes to outlying star systems is in dispute. Hoping to resolve the matter with a blockade of deadly battleships, the greedy Trade Federation has stopped all shipping to the small planet of Naboo. While the congress of the Republic endlessly debates this alarming chain of events, the Supreme Chancellor has secretly dispatched two Jedi Knights, the guardians of peace and justice in the galaxy, to settle the conflict. . .
The story begins as the two Jedi Knights secretly journey to the Federation flagship. They have been assigned as ambassadors by the Republic's Supreme Chancellor Finis Valorum (Terrence Stamp), the leader of the Galactic Senate. They arrive in the orbit of the threatened and blockaded planet Naboo to resolve the trade route taxation dispute and meet with Viceroy Nute Gunray (Silas Carson).
A dispute exists between the oppressive Trade Federation and the outlying systems of the declining Galactic Republic. The two Jedi are: Master Qui-Gon Jinn (Liam Neeson) and Obi-Wan Kenobi (Ewan McGregor), his young apprentice (or Padawan). After docking their vessel in a massive Saak'ak battleship (the headquarters of the Trade Federation fleet), they are escorted to a conference room by a droid.
Obi-Wan expresses his concern to his Master: "I have a bad feeling about this...it's something elsewhere, elusive." The apprentice is instructed: "Be mindful of the living Force." The droid reports to his Neimoidian masters who are in charge of the blockade, Viceroy Nute Gunray and Lieutenant Rune Haako (Jerome Blake), revealing that the two ambassadors are powerful and wise Jedi Knights.
Gunray decides to contact their evil and mysterious master, Sith Lord Darth Sidious (seen in a flickering blue hologram) who orders the two Jedi to be killed immediately. [The Sith were ancient enemies of the Jedi.] The Jedis' starship Radiant VII is destroyed, and a Dioxis gas fills the room where the Knights are waiting. With lightsabers drawn, they are forced to fight against ten Battle droids with blasters.
They then face two rolling Destroyer droids ("droidekas") with shield generators. They reach the main hangar where they see that their ship has been demolished, that Battle droids are assembling into an invasion army of the Federation - and they are trapped. Qui-Gon announces that they needed to warn Naboo and its pacifist Queen Amidala (Natalie Portman) about the impending attack, and also contact Chancellor Valorum.
Amidala disapproves of the blockade and complains to Gunray. Shortly later, Naboo's communications systems are disabled - the first evidence of an attack. The Jedi decide to split up, stow aboard separate landing crafts, and meet down on the planet of Naboo. After a successful escape on a Trade Federation vessel, the two Jedi land in a murky swamp.
Qui-Gon saves Gungan outcast creature Jar Jar Binks (Ahmed Best) from being crushed by a giant Federation troop transport. To protect them from the Federation Army attack, the banished Jar Jar leads them, with special breathing masks, to a "safe city" - the hidden underwater Gungan realm of Otoh Gunga composed of giant connected bubble structures.
There, the Jedi are surrounded by guards with long electropoles who are riding on huge kaadu creatures. They are taken to Boss Rugor Nass (Brian Blessed), the ruler of the underwater village of Otoh Gunga, who refuses a request to help the people of Naboo. However, he offers a bongo submarine transport to help them reach the Naboo capital city of Theed.
Boss allows them to take Binks as their navigator through the planet's core. Their transport is attacked by a giant sea creature, a huge opee sea killer with a gooey, extended purple tongue. An even bigger sando aqua monster emerges and chomps the fish in half. They lose power, but when it comes back, they startled a giant colo claw fish which begins pursuit.
During their flight, they navigate straight toward the jaws of the sando aqua monster behind them, but avoid the danger as the monstrous fish bites into the claw fish. They continue on to Theed to rescue the Queen from the Trade Defense Forces. The invasion and seige of Naboo by droids and tanks are on schedule. Battle droids have entered the capital city of Theed, taken over the Queen's palace, and captured the Queen.