A narrator, (Katara) speaks of a time when the Avatar, master of all four elements, kept peace between the four nations: the Water Tribes, Earth Kingdom, Fire Nation, and Air Nomads, until he mysteriously vanished, and the Fire Nation attacked. A century later, the Fire Nation is on the brink of victory in its imperialist war. Two years ago, Katara's father and the men of the Southern Water Tribe went to the aid of the Earth Kingdom troops. Though things look bleak, Katara still hopes the Avatar will return and save the world.
While fishing near their village in the South Pole, two teenagers — Katara, a young Waterbender, and her older warrior brother Sokka — accidentally steer their canoe into a rip current, where it is crushed between ice floes. Left stranded on a floe, Sokka blames Katara for their predicament, because "girls always mess things up". Katara begins to yell angrily about his inconsiderate behavior, gesturing emphatically as she does so. Unbeknownst to her, she is involuntarily Waterbending, and accidentally cracks a massive iceberg directly behind her.
As the top of the iceberg crumbles into the sea, a large, spherical underwater portion bobs to the surface, revealing a large bison and boy, trapped in a state of hibernation. After being revealed, the boy's tattoos begin to glow while he opens his eyes, and Katara realizes the boy is actually alive. She grabs her brother's club and shatters the iceberg, freeing him. When she does so, a column of bright light shoots up from the iceberg into the sky.
On a Fire Nation warship just off the coast, Prince Zuko, an armor-clad teenager with a burn scar over his left eye, eagerly tells his skeptical Uncle Iroh that the light must have been caused by the Avatar. Dismissing his uncle's advice to not get his hopes up, and to calm down with some tea, Zuko orders the course be set for the light, determined to capture the Avatar.
The boy falls out of the iceberg and collapses into Katara's arms. The boy quickly wakes from his sleep, and immediately asks her to go penguin-sledding with him. He then introduces his flying bison, Appa. An incredulous and suspicious Sokka says the boy generated the light to signal the Fire Nation Navy, to Katara's irritation. After a sneeze causes the boy to soar high into the air, then fall back down without any harm, the boy introduces himself as Aang, an Airbender, and offers to escort them home on Appa.
As evening wears on, Iroh advises Zuko to get some rest, and reminds him that his quest is as futile as when his father, grandfather, and great-grandfather attempted it. Zuko tersely comments that they hadn't found the Avatar because their honor was not at stake, unlike him. Meanwhile, riding on a swimming Appa's back, Katara asks Aang if he knows what may have happened to the Avatar. He replies hesitantly that he never knew the Avatar, although he "knew people who knew him."
Aang falls into a nightmarish sleep that night, filled with memories of being caught in a storm with Appa and dragged underwater, reflexively channeling some otherworldly force to freeze them both in an ice sphere.
He wakes in the tiny Southern Water Tribe village, and is swiftly introduced to the remaining population of women and children, who regard him in fear and awe. Katara's grandmother explains to Aang that Airbenders have been thought to be extinct for the past hundred years. Aang diffuses the tension by showing off his flying skills on his glider after Sokka claims it would not be a good weapon. Katara then expresses joy with her grandmother at having finally found a Master Bender who may be able to teach her.
Iroh, meanwhile, is teaching Firebending basics to Zuko, drilling the prince and his infantry sparring partners in a sequence Zuko can't quite complete correctly. After Iroh lectures on the importance of strength as an extension of breath and not brute force for Firebending, an impatient Zuko tries to browbeat Iroh into teaching him a more advanced set. Zuko reasons that it will take more than basics to defeat the Avatar, who has had a century to master all the elements. Iroh grudgingly acquiesces, but first takes a moment to finish his roast duck.
Back at the village, Sokka is failing miserably at instilling a warrior's spirit into several small boys that make up his ersatz "army", and is further frustrated when Aang lures them away with games and jokes. When Sokka lambastes Aang for indulging in fun during wartime, Aang doesn't understand which war he meant. As Aang bolts off in pursuit of a penguin, Katara trails after.
While Aang chases penguins, he and Katara strike up a bargain: If she shows him how to catch one, he'll take her to the Northern Water Tribe, at the North Pole, to find a Waterbending Master to teach her. Katara obligingly tosses Aang a fish as bait, and soon they are both riding on the backs of penguins. They sled down towards the shoreline at dizzying speeds, until they come upon the wreck of a warship, torn open on jutting ice shelves.
Katara explains that it is a Fire Nation ship and a very bad memory for her tribe. As Aang begins to walk towards the warship, she informs him that they can't go in, as it is forbidden, as well as the possibility that the ship may be laced with booby traps. Overcome with curiosity, Aang enters anyway, convincing Katara to follow suit by stating that a bender must let go of fear. As they explore the ship, Katara goes on to tell how the vessel has haunted their tribe since her Grandmother was a little girl, and that the Fire Navy ship dates from the Fire Nation's first attacks. Aang expresses confusion about the war, as there was no war before he was frozen. Katara realizes that he was frozen for a hundred years, and comforts Aang while he copes with the shock.
Unfortunately, while trying to find a way out, Aang triggers a tripwire, which sends up a signal flare. Katara and Aang escape the shipwreck, but not before Zuko sees them heading toward the village through a telescope. Zuko tells his crew to wake his uncle and report that he has finally found the Avatar.
