The movie begins with a war galley caught in a storm at sea. The ship's weatherworker is distressed to realize that he has lost the power to control the wind and waves, but is even more disturbed when he observes two dragons fighting above the clouds, one of which is eventually killed.
Shortly thereafter the King, already troubled by tales of drought and pestilence in the land, receives news both of the strange omen at sea and of the disappearance of his son, Prince Arren. The King's wizard tells the tale of how dragons and men were once one, until dragons chose freedom, and men chose possessions, and of his fears of how the land's plight is due to a weakening of the Balance. The King has little time to ponder on this before he is set upon and killed in a dark corridor by a young lad, who turns out to be his son Arren. The prince steals his father's sword and flees the palace.
The action now moves to a desert where Arren is pursued by wolves, and rescued by a wizard who turns out to be Sparrowhawk the Archmage. Arren accompanies Sparrowhawk and travels to the city of Hortown. Arren goes to explore the town alone, suddenly becoming scared as if something is following him. As Arren runs away, he sees a young girl, Therru, fleeing from slave hunters from whom he then saves her.
Later in the evening Arren is captured by the slave hunter but loses his sword as the hunter believes it to be worthless junk. Arren is rescued by Sparrowhawk from the slavers, and they travel to a farm where Therru is looked after by a woman, Tenar, whom Sparrowhawk knows.
The head slaver ("Hare") reports back into a castle to Lord Cob, and almost pays with his life for the loss, until he tells Cob that Sparrowhawk freed the slaves. Lord Cob orders him to bring Sparrowhawk to the castle. Sparrowhawk at the farm reveals that he is investigating the cause of the Balance being upset and leaves for Hortown, in which he discovers the sword that Arren had is in a merchant shop. Sparrowhawk is then encountered by Hare, but he transforms his face to disguise himself. When the slave hunter leaves, he buys the sword.