The Elves of Eregion, under the rule of Celebrimbor, were great craftsmen and smiths. However, in approximately 1200 of the Second Age, they were tricked into learning how to make Rings of Power by the Dark Lord Sauron, who was disguised as a man called Annatar, though Gil-Galad and Elrond warned against him. The first Ring of Power was forged about three hundred years later, and a total of sixteen were made in the years following, all adorned with gems.
Unbeknownst to Sauron, however, Celebrimbor made his own three Rings, which were more powerful than the rest. Narya, Nenya and Vilya were their names; Fire, Water and Air. And at the same time Sauron was busy in Mordor forging the One Ring to control the rest. But because the Elves had made their own powerful Rings, they became aware of the One and took off their Rings to be protected from its dominating power.
Sauron, enraged at learning what the Elves had done, set forth his armies upon Middle-earth. But before the Ruin of Eregion Celebrimbor, who himself was slain, sent away the Three Elven Rings for safekeeping. The other sixteen, however, the Dark Lord claimed for himself, and using nine of them he ensnared nine Kings of Men, thus turning them into the Ringwraiths. He also attempted to take control of the Seven Dwarf Lords, but they were resistant to the Dark Power of the Rings.
Toward the end of the Second Age, several hundred years later, Sauron was defeated and slain, and Isildur, son of Elendil, heir to the Throne of Gondor, cut the One Ring from Sauron's hand and claimed it as his own. However, before long he was slain in the River Anduin, and the whereabouts of the Ring passed out of all knowledge.
Years later the Ring was found by Sméagol, a hobbit, who took it deep into the Misty Mountains, where, later come across by Bilbo Baggins, it was taken to The Shire, where it passed to Frodo, who took it into the heart of Mordor, where it was cast into the fires in which it had been forged, destroying it and disabling all other Rings.