The movie opens several months after the events in the first Iron Man movie. We are introduced to a man named Ivan Vanko. Ivan's father Anton is slowly dying and telling Ivan his final wishes. Ivan thinks he should have the fame that Tony Stark is enjoying but Anton tells him to ignore that garbage. All Anton can give Ivan is his knowledge. Ivan then sets about recreating the Arc reactor and begins building his own version of the Iron Man suit. Tony Stark has become a champion for world peace thanks to the Iron Man suit, and has practically solved world peace, or so he claims.Six months after the end of the first movie, Tony Stark has used his Iron Man armor to bring about a negotiated peace treaty between the major super powers of the world, and his immense popularity with the general public is only furthered when he fulfills his father's dream by reopening the "Stark Expo" in Queens, NY, to showcase all the latest inventions that will benefit the world. Tony Stark fulfills this dream by flying into the expo and making a gigantic entrance to become the new symbol of world peace. After the event, Stark is contacted by Senator Stern to appear before the Senate Armed Forces Committee. Tony and Happy decide to take a road trip to Washington DC in Tony''s new Audi R8.There, the hearing is being broadcast on CSPAN, and there Tony's usual brand of humor becomes the center of attention while completely ignoring the fact that the Senate has classified Iron Man as a weapon and that he is under investigation. While there, he's greeted by best friend James Rhodes, who led the investigation into the events surrounding Iron Man's creation. Rhodes' investigation is taken way out of context by Senator Stern. Justin Hammer, a rival weapons contractor, gives a presentation about how other countries are making copies of the Iron Man suit, or weapon as they refer to it. Tony gives a rebuttal showing that he is Iron Man and will not part with his armor, and that the "attempts" at copying Iron Man are from Iran, North Korea, and Hammer Industries, and are extremely poor quality.Back at home, Tony is on JARVIS analyzing the latest prototypes and developments for the Iron Man suit, and Pepper enters and the two start having arguments about the future of Stark Industries. Tony is telling Pepper that he's making more money off the company's common stock than he ever did as CEO. He decides he's had enough of being the CEO and wants to focus solely on developing Iron Man. He decides to appoint Pepper as the new CEO and she is stunned. The next day a stunningly beautiful notary public enters to have Tony officially sign the company over to Pepper. Tony is undergoing fighting training with Happy and performs an illegal move on him, getting it confused with MMA. The notary's name is Natalie Rushman, and he has Happy give her a boxing lesson, and while looking up her bio, Natalie performs a TKO on Happy.Tony heads to Monaco for some much needed R & R. At a pre reception before the Monaco 500, where Stark Industries is sponsoring a driver, Tony's greeted by his favorite "Vanity Fair" reporter Christine Everheart, who wants Pepper for the cover of the next issue introducing her as the new Stark Industries C.E.O., and of course Justin Hammer also happens to be there. They also greet Tesla Motors CEO Elon Musk who wants a panel at the Stark Expo to showcase his latest invention. In the bathroom, it's learned that the palladium in Tony's chest is slowly spreading, and his arc reactor can barely take the punishment. Tony decides that he's going to be driving the Stark Industries car instead of the driver that was already pre selected. While racing his Formula 1 car in Monaco, Stark is attacked by Ivan Vanko, who has constructed a miniaturized arc reactor of his own. It is contained in a chest harness with two attached whips, powered by the reactor's energy.Vanko uses the whips to create a massive car crash in the race and goes after Stark. As Vanko is wrecking havoc on the track, Happy and Pepper rush to deliver the briefcase Happy is put in charge of to Tony. Vanko uses his electric whips to completely destroy the Rolls Royce Phantom that Happy and Pepper are in, and after repeated ramming attempts, Pepper finally manages to give Tony the briefcase. What's inside the briefcase is another Iron Man suit. This time, Tony is able to defeat Vanko by manually pulling out the Arc Reactor battery that powers his whips. The entire crowd is stunned at what they've just witnessed, but not Justin Hammer, who believes that Vanko can be put to better use.Stark confronts Vanko in prison and Vanko asks Tony what it feels like to be a dead man and that palladium in the chest is a very painful way to die. Stark tells Vanko that makes two of them. In prison Vanko is given a meal consisting of chicken and mashed potatoes along with a note telling him to enjoy the potatoes. Vanko and another prisoner are wearing uniforms with the same identification. Vanko immediately kills the prisoner as well as a guard on his way out the door, and sets the explosive device contained in the potatoes and as he makes his escape, he's bagged by two guards and taken away. It's then revealed that Justin Hammer purposefully broke Vanko out of prison as they both share the same common hatred for Tony. Hammer knows Vanko needs his resources to do this, and Vanko obliges. Hammer then hires Vanko to build suits based on existing designs. Vanko tells Hammer they are doing everything wrong.On the plane back home, Tony and Pepper are watching the aftermath of the events that took place and are watching a rather angry Senator Stern unload his frustrations with Tony on The O'Reilly Factor. Stern is saying that Tony Stark lied to the Senate Armed Forces Committee, and that he's in danger of being arrested on felony perjury charges. The reason being is that he told the Senate that other countries, as well as Hammer Industries, were 20 years away from having anything that remotely resembled Iron Man. But Vanko surprised everyone by making an exact copy of the Arc Reactor. Tony presents Pepper with a gourmet meal and is going to tell her the truth, but they have an awkward moment as Pepper knows that something is up and that Tony isn't telling her the whole truth.Back home, Tony is using JARVIS to conduct investigations into Ivan Vanko. It's revealed that Vanko's father Anton Vanko was Howard Stark's partner and one of the co founders of Stark Industries. Howard Stark found out that Vanko was conspiring to sell weapons to the Soviet Empire and had him arrested for treason and deported to Russia. Ivan has been seeking revenge against the Stark empire ever since. While sitting in one of his hot rods in his basement, Tony nearly collapses and is discovered by Rhodes who tells him that this isn't a good look for him. Rhodes also tells him that he's been battling with the Pentagon by stopping them from coming to his Malibu house and taking his suits to be used for weaponized purposes.Tony is then preparing for what he believes will be his last birthday party. He asks Natalie what she would do if this were her last birthday party. Natalie responds that she'd do whatever she wanted with whoever she wanted to do it with. While at the party, Tony is extremely drunk and wearing the Iron Man suit. While Tony's making a fool of himself and telling the huge crowd at the party what it's really like to be Iron Man and wearing the armor. In the background, Pepper and Rhodes are discussing that he's gone way off the deep end. Rhodes tells Pepper that he's tired of dealing with the Pentagon and the Senate Armed Forces Committee. Rhodes, finally having enough of Tony's antics, goes and dons one of the in-development Iron Man suits. He then challenges Tony to a fight, where Tony has the in-house DJ play some good background tunes. The battle ends in a stalemate and Rhodey flies off in the Mark II armor, delivering it to military authorities at Edwards Air Force Base. Justin Hammer is later invited to study the suit himself and provides them with advanced weapons to arm it with.The next day, he's at the famous Los Angeles landmark doughnut shop Randy's Doughnuts, sitting in the Iron Man suit atop the famous giant plastered doughnut. Disgraced and hungover, Stark is approached by Nick Fury of S.H.I.E.L.D who tells Stark that the problems he's having with the government and his drunken Iron Man antics? That is the least of his worries, he's got bigger problems to deal with in the Southwest region. Tony wonders if Fury and the "Avengers Initiative" is real, and Fury reassures Tony that it's real, and that he knew Howard Stark very well, in fact Howard Stark was one of the founding members of S.H.I.E.L.D. (Strategic Homeland Intervention, Enforcement, And Logistics Division), the agency he works for. They are joined by agent Phil Coulson and Natalie Rushman, whom Fury reveals is, Natasha Romanoff, an undercover operative of SHIELD, planted to monitor Tony himself. A hungover Tony is stunned at this revelation and fires Natalie/Natasha, but she then tells Tony that it's none of his business and that he's under investigation from S.H.I.E.L.D. , and she and agent Coulson are there to make sure Tony follows orders and doesn't screw up. She injects Tony with a serum that slows the symptoms of his palladium poisoning significantly, giving him the time to find an alternate element to keep him alive.Fury provides Tony with a chest of his father's old artifacts that can hopefully be used to find a cure for his condition. Tony resists further attempts from S.H.I.E.L.D. interference, but Agent Coulson reassures Tony that he's not going anywhere until Tony finds the answers that he's seeking about his heart. Reviewing the film reels in the chest, Stark discovers a message from his father that leads him to the original 1974 diorama of the Stark Expo: in reality, it is a disguised diagram for the atomic structure of a new element.Stark performs a radical alteration of his home and hand-builds a particle accelerator with the aid of his computer J.A.R.V.I.S.. Stark synthesizes this new element, creating a new triangular chest arc reactor that cures his poisoning and is much more powerful than Stark's earlier versions. Just before Tony completes the particle acceleration, Coulson tells him that he's free to go and that S.H.I.E.L.D. has reassigned him to another case.At Hammer Industries, Vanko has radically changed the design of Hammer's suits: they are now automated drones. Despite what Vanko considers improvements, Hammer is displeased and imprisons Vanko in a small room with two guards while he takes the drones to the Stark Expo.Hammer unveils his new military drones, captained by Rhodes in a heavily-weaponized (although surprisingly weak given that it is Hammer Industries, after all) version of the confiscated Mark II armor. Unfortunately, it is soon discovered that Vanko has programmed the drones, giving himself complete control. He also has control of Rhodes' new armor, and Stark arrives just as they go on the attack. As Stark battles these remote-controlled enemies, Happy Hogan and Romanoff race to Hammer's Queens facility to stop Vanko. By the time they arrive, Vanko has already departed for the Expo in a new armored suit, an updated version of the harness he used when he attacked Tony in Monaco. But at the Stark Expo, just as Hammer has finished his presentation, the drones attack the standing room only crowd and they begin to flee. Stark and Rhodes chase after the drones and destroy each and every one of them, while Agent Romanoff has Justin Hammer arrested for harboring the fugitive Vanko.Natasha is able to give Rhodes control of his armor again so that he and Stark can fight Vanko together. The two armored allies combine their powers and successfully destroy all the drones. When they are attacked by Vanko, they are able to take him down, but Vanko's armor and drones are revealed to have been equipped with self-destruct charges. As they begin to explode, Stark races to save Pepper, rescuing her at the last moment. After landing on a roof she quits her CEO position, and she finally gives Tony a kiss, to which they both find Rhodes sitting a few meters away. Tony finally tells Pepper the truth about his heart, and she completely freaks out. He then claims he was there first so they should get their "own roof" after Stark tries to defend himself.At a debriefing, Fury informs Stark that while Stark is "unsuitable" for the "Avengers Initiative", SHIELD. wants Stark as a consultant. Stark agrees on the condition that Senator Stern personally present him and Col. Rhodes with their medals for bravery. But Senator Stern is less than amused when he presents Tony with his medal.In a post-credits scene, SHIELD. agent Coulson is seen driving to a remote impact crater in the New Mexico desert. As he informs Fury over the phone that they've "found it", the crater is shown to contain Mjolnir, the hammer of Thor.