In Afghanistan to introduce new weaponry, playboy and genius engineer Tony Stark is captured by a terrorist organization known as the Ten Rings after being severely wounded in an explosion. The terrorists imprison him in a cave along with Yinsen, an engineer. Slowly dying from the injuries sustained in his capture, Tony creates an electromagnet with the help of Yinsen which keeps the shrapnel away from his heart. Soon they begin work on an arc reactor and a power suit which will aid in their escape. Completing it in secret, Stark manages to escape, in the process destroying much of the terrorist base with his suit's weapons. He crashes it in the desert shortly after escaping, and is rescued.
Upon returning home, Stark insists that Stark Industries cease production of weaponry, to the consternation of Obadiah Stane, Stark's father's business partner and manager of the company, who believes this will ruin the business. Meanwhile, Stark works on creating a vastly improved version of his suit. Learning that Stark weapons are being used by the Ten Rings, and that Stane is attempting to take over control of the company, an angered Stark flies to Afghanistan and stops a Ten Rings attack on Yinsen's home village. On his return flight he is attacked by members of the US Air Force, and is forced to reveal his secret identity to James Rhodes in order to end the attack. In Afghanistan, members of the Ten Rings, working together with Stane, salvage the wrecked remains of Stark's original suit. Stane has the group destroyed, and reverse engineers a version of the suit. In pursuit of the person who is leaking Stark technology to the Ten Rings, Stark sends his assistant Pepper Potts to investigate the computer systems at Stark Industries. She learns of Stane's involvement with, and later reveals this information to Agent Coulson of SHIELD.
Stane, frustrated by his inability to create a working arc reactor, attacks Stark and steals his arc reactor, paralyzing him and dooming him to a slow death from the shrapnel. Stark is able to save himself using his original arc reactor. He confronts Stane wearing his armour, while Stane is similarly outfitted in his reverse engineered suit. The pair fight, and Stark is able to defeat Stane by orchestrating the overload of a massive arc reactor; Stane dies in the explosion. Stark reveals his identity as Iron Man at a press conference, contravening the orders of Agent Coulson.