Genius, billionaire, and playboy Tony Stark, who has inherited the defense contractor Stark Industries from his father, is in war-torn Afghanistan, with his friend and military liaison Lieutenant Colonel James Rhodes, to demonstrate the new “Jericho” missile. After the demonstration, the convoy is ambushed and Stark is critically wounded by one of his own company’s rocket-propelled grenades. He is captured and imprisoned in a cave by a terrorist group, the Ten Rings; Yinsen, a fellow captive who is a doctor, implants an electromagnet into Stark’s chest to keep the shrapnel shards that wounded him from reaching his heart and killing him. Ten Rings leader Raza offers Stark freedom in exchange for building a Jericho missile for the group, but Tony and Yinsen agree Raza will not keep his word.
Stark and Yinsen quietly build a smalll, powerful electric generator called an arc reactor to power Stark’s electromagnet and a suit of powered armor to aid in their escape. Although they keep the suit hidden almost to completion, the Ten Rings discover their hostages’ intentions and attack the workshop. Yinsen sacrifices himself to divert them while the suit is completed. The armored Stark battles his way out of the cave to find the dying Yinsen, then in anger burns the Ten Rings’ weapons and flies away, crashing in the desert and destroying the suit. After being rescued by Rhodes, Stark returns home and announces that his company will no longer manufacture weapons. Obadiah Stane, his father’s old partner and the company’s manager, advises Stark that this may ruin Stark Industries and his father’s legacy. In his home workshop, Stark builds a sleeker, more powerful version of his improvised armor suit, as well as a more powerful arc reactor for his chest. Personal assistant Pepper Potts places the original reactor inside a small glass showcase. Though Stane requests details, Stark keeps his work to himself.
At a charity event held by Stark Industries, reporter Christine Everhart informs Stark that his company’s weapons, including the Jericho, were recently delivered to the Ten Rings and are being used to attack Yinsen’s home village, Gulmira. Stark also learns Stane is trying to replace him as head of the company. Enraged by these revelations, Stark dons his new armor and flies to Afghanistan, where he saves the villagers. While flying home, Stark is shot at by two F-22 Raptor fighter jets. He reveals his secret identity to Rhodes over the phone in an attempt to end the attack. Meanwhile, the Ten Rings gather the pieces of Stark’s prototype suit and meet with Stane, who subdues Raza and has the rest of the group killed. Stane has a massive new suit reverse engineered from the wreckage. Seeking to find any other weapons delivered to the Ten Rings, Stark sends Pepper to hack into the company computer system from Stane’s office. She discovers Stane has been supplying the terrorists and hired the Ten Rings to kill Stark, but the group reneged. Potts meets with Agent Phil Coulson of S.H.I.E.L.D., a counter-terrorism agency, to inform him of Stane’s activities.