Playboy and genius engineer Tony Stark, who is in Afghanistan to introduce his company's new weaponry, is severely wounded in an explosion and captured by a terrorist organization known as the Ten Rings. The terrorists imprison him in a cave, along with Yinsen, a meek engineer. Slowly dying from the injuries sustained in his capture, Tony creates an electromagnet with the help of Yinsen, which keeps the shrapnel in his chest 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, destroying much of the terrorist base with his suit's weapons in the process. He crashes it in the desert shortly after departing 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 the Ten Rings are using Stark weapons and that Stane is attempting to take 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, 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 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 armor, 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.