Tony Stark (Robert Downey, Jr.) is the head of Stark Industries, a major military contracting company he inherited from his father. Even though Stark is an inventive genius and wunderkind, he is also a playboy. One day, while his father’s old partner, Obadiah Stane (Jeff Bridges), takes care of day-to-day operations, Stark flies to war-torn Afghanistan with his friend and military liaison,Lieutenant Colonel James Rhodes a.k.a. “Rhodey” (Terrence Howard), for a demonstration of Stark Industries’ new weapon, the “Jericho” missile. However, Stark is critically wounded in an assault and finds himself the prisoner of an Afghan terrorist group known as the Ten Rings. Shrapnel in his chest is kept from entering his heart and killing him by an electromagnet built by fellow captiveDr. Yinsen (Shaun Toub). The Ten Rings leader, Raza (Faran Tahir), offers Stark his freedom in exchange for building a Jericho missile for the group, but Tony and Yinsen agree Raza will not keep his word.
During his three months of captivity, Stark and Yinsen secretly build a powerful electric generator called an arc reactor, which will power Stark’s electromagnet, and then begin to build a suit of armor to escape. The Ten Rings attack the workshop when they discover what Stark is doing, and Yinsen fights back to buy Stark time as the suit powers up. The armored Stark battles his way out of the caves and finds the dying Yinsen, who tells him not to waste his life. Stark burns the terrorists’ munitions and flies away to crash in the desert, destroying the suit. After being rescued by Rhodes, Stark returns home and announces that his company will no longer manufacture weapons. Stane advises Stark that this may ruin Stark Industries and his father’s legacy. In his home workshop, Stark builds an improved version of his suit as well as a more powerful arc reactor for his chest.
When Stark makes his first public appearance after his return, reporter Christine Everhart (Leslie Bibb) informs him that Stark Industries’ weapons, including the Jericho, were recently delivered to the Ten Rings and are being used to attack Yinsen’s home village. He also learns that Stane is trying to succeed him as head of the company. Enraged, Stark decides to intervene using his now finished suit. In a lengthy and elaborate scene, Stark dons his new armor and then flies to Afghanistan where he saves Yinsen’s village and turns Raza’s subordinate over to the villagers. While flying home, Stark is shot at by two F-22 Raptor fighter jets. He calls Rhodes on his cell phone and reveals his secret identity in an attempt to get the attack called off. Meanwhile, the Ten Rings find the pieces of Stark’s prototype suit and meet with Obadiah, who has the group eliminated and has the company’s engineers reverse engineer a new suit from the wreck. Seeking to find any other weapons delivered to the Ten Rings, Stark sends his assistant Virginia “Pepper” Potts (Gwyneth Paltrow) to hack into the company computer system from Obadiah’s office. She discovers Obadiah has been supplying terrorists with Stark weaponry and hired the Ten Rings to kill Stark, but the group reneged on the deal upon discovering who the target was. Pepper, soon after, meets with agent Phil Coulson (Clark Gregg) of the “Strategic Homeland Intervention, Enforcement and Logistics Division”, a counter-terrorism agency, to inform him of Obadiah’s activities.
Stane’s scientists cannot duplicate Stark’s arc reactor, so Stane ambushes Stark in his home, using a sonic device to paralyze him and take his arc reactor. Left to die, Stark crawls to his lab and retrieves his original reactor. Potts and several S.H.I.E.L.D. agents attempt to arrest Stane, but are attacked by him in his now functional suit. Stark races to the rescue and fights Stane, but is quickly overpowered without his new reactor to run his suit at full capacity. Stark lures him atop the Stark Industries building and instructs Potts to overload the large arc reactor in the building. This unleashes a massive electrical surge that knocks Stane unconscious, causing him and his armor to fall into the exploding reactor. The next day, the press has dubbed Stark in his armor as “Iron Man”. Agent Coulson gives him a cover story to explain the events of the night and Stane’s death. At a press conference, Stark starts to tell the cover story given to him by S.H.I.E.L.D., but then announces that he is Iron Man.
In a post-credits scene, S.H.I.E.L.D. Director Nick Fury (Samuel L. Jackson) visits Stark at home, and, noting that Iron Man is not “the only superhero in the world”, says he wants to discuss the “Avenger Initiative“.