Tony Stark recalls a New Years Eve party in 1999 where he meets scientist Maya Hansen, the inventor of Extremis, an experimental regenerative treatment intended to allow recovery from crippling injuries. Disabled scientist Aldrich Killian offers them a place in his company Advanced Idea Mechanics, but Stark rejects the offer, humiliating Killian.

Years later, six months after the Battle of New York, Stark's experiences during the alien invasion are giving him panic attacks. Restless, he has built several dozen Iron Man suits, creating friction with his girlfriend Pepper Potts. Meanwhile, a string of bombings by a terrorist known only as the Mandarin has left intelligence agencies bewildered by a lack of forensic evidence. Stark's security chief Happy Hogan is badly injured in a Mandarin attack, causing Stark to issue a televised threat to the Mandarin, who responds by destroying Stark's home with helicopter gunships. Hansen, who came to warn Stark, survives the attack along with Potts. Stark escapes in an Iron Man suit, which his artificial intelligence J.A.R.V.I.S. pilots to rural Tennessee, following a flight plan from Stark's investigation into the Mandarin. Stark's experimental armor lacks sufficient power to return to California, and the world believes him dead.

Teaming with Harley, a precocious 10-year-old boy, Stark investigates the remains of a local explosion bearing the hallmarks of a Mandarin attack. He discovers the "bombings" were triggered by soldiers subjected to Extremis, which at this stage of development caused certain subjects to explosively reject the treatment. After veterans started exploding, these explosions were falsely attributed to a terrorist plot in order to cover up Extremis's flaws. Stark witnesses Extremis firsthand when Mandarin agents Brandt and Savin attack him. With Harley's help, Stark traces the Mandarin to Miami and infiltrates his headquarters using improvised weapons. Inside he discovers the Mandarin is actually an English actor named Trevor Slattery, who says he is oblivious to the actions carried out in his image. Killian, who appropriated Hansen's Extremis research as a cure for his own disability and expanded the program to include injured war veterans, reveals he is the real Mandarin, using Slattery as a cover. After capturing Stark, Killian shows him Potts (whom he had kidnapped) being subjected to Extremis, in order to gain Stark's aid to fix Extremis's flaws and thus save Potts. Killian kills Hansen when she has a change of heart and tries to stop him.

Killian has manipulated American intelligence agencies regarding the Mandarin's location, luring James Rhodes

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