During a business trip to Afghanistan to demonstrate Stark Industries' new weapon, Tony Stark is kidnapped by the terrorist group Ten Rings, who orders him to build a missile for them. Instead, he and fellow captive Yinsen secretly build a powered suit of armor. During this time, Yinsen also acts as Stark's mentor, showing him humility and telling him of the horrors his company has caused, making Stark reconsider his life. Armed with a flamethrower and missiles, Stark uses the armor to destroy the terrorists' weapons stockpile and escape their camp, but Yinsen is killed, and the armor is destroyed. Upon being picked up by the Air Force and returning to the United States, Stark declares that his company will no longer manufacture weapons, a move disapproved by his business partner Obadiah Stane.
With the help of his personal A.I. J.A.R.V.I.S., Stark develops an updated and more powerful version of his armor, adding Stark Industries' new repulsor technology and flight capability. While testing his new suit at Stark Industries, Tony uses it to fend off an attack by the Maggia crime family, who have been providing weapons for the Ten Rings. Using his new Mark III "Iron Man" armor, Stark destroys the Maggia's weapons stockpiles and an armored hovercraft. On the way home, he establishes contact with his friend Lieutenant Colonel James Rhodes and reveals his identity as Iron Man.
Tony then returns home, where Pepper Potts discovers what he has been doing. Rhodes then starts to help Stark with his desires, informing him of a weapons transport in Afghanistan. Stark follows the transport, destroying the weapons, defeating the villain Blacklash, a former Stark Industries worker, in the process, before proceeding to the Maggia's compound to destroy the rest of the weapons, and after infiltrating the mansion, he confronts Madame Masque, who is killed when a wall falls on her. Stark then destroys the Maggia's flying fortress, ending their threat.
Meanwhile, Stane secretly recovers the first Iron Man armor in Afghanistan and starts working with the company Advanced Idea Mechanics (A.I.M.), Stark Industries' former top buyers, to create a power source. After A.I.M. attacks a nuclear facility in Russia, Iron Man foils them and also defeats Boris Bullski, who created a titanium armor similar to Tony's, thus becoming the "Titanium Man." Stark then thwarts A.I.M.'s attack on a military ship in the Arctic and defeats the Controller.
After returning to Stark Industries, Tony fights off an attack by A.I.M. forces under the command of Titanium Man, who was actually sent by Stane to steal the Iron Man suit. After discovering Stane's involvement with A.I.M. and the Ten Rings, Tony is ambushed by Stane, who steals his arc reactor to create a power source for his own armor. Stark is rescued by Rhodey and learns that A.I.M. has kidnapped Pepper to use her as bait. He then uses his armor to save Pepper from an A.I.M. facility and prevents the explosion of their reactor. Stark decides that A.I.M. is a bigger menace than Stane and decides to confront them first. He heads to their island and destroys their proton cannon before defeating the Melter and destroying A.I.M.'s space tether, ending their menace.
Stark then returns home and battles Stane, who has donned the "Iron Monger" suit. As the battle reaches the top of Stark Industries, Stark orders Pepper to overload the arc reactor at the building. The plan works, and Stane is killed. With all the villains gone, Tony Stark decides to continue helping mankind as Iron Man.