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In Russia, Ivan Vanko watches his father, Anton, die broke. Anton once worked with Howard Stark and was deported. Ivan takes the old blueprints and builds his own arc reactor, with revenge on the Stark family in mind.
Six months after going public as Iron Man, Tony Stark is on top of the world. He revives the Stark Expo in New York and, at a Senate hearing, refuses to hand his suit over to the government, making Senator Stern and rival Justin Hammer look foolish. But he is hiding something: the palladium powering the reactor in his chest is poisoning his blood, and nothing he tries can replace it. Sure he is dying, Tony starts living on the edge. He makes Pepper Potts CEO and hires a new assistant, Natalie Rushman.
At the Monaco Grand Prix, Tony decides to drive his own car. Vanko walks onto the track with electrified whips and slices cars in half. Pepper and Happy Hogan get the briefcase suit to Tony, and he wins the fight. Vanko goes to prison, but the message is clear: Stark tech can be copied. Hammer fakes Vanko's death, breaks him out and hires him to build suits for the military.
At his birthday party, Tony gets drunk and goes wild in the armor. Rhodes puts on another suit to stop him, and they wreck the house fighting. Afterward, Rhodes takes that suit to the Air Force, which hands it to Hammer. Nick Fury shows up with a scolding and a reveal: Natalie is S.H.I.E.L.D. agent Natasha Romanoff. Fury gives Tony a box of Howard's things. In old footage, his father calls Tony his greatest creation, and the model of the 1974 Expo hides the design for a new element. Tony synthesizes it and cures himself.
At the Expo opening, Hammer shows off military drones and Rhodes in the weaponized suit, now called War Machine. Vanko takes control of all of it and sends it after Tony. Natasha and Happy raid Hammer's plant, and she gives Rhodes back control of his armor. The two friends fight side by side against Vanko, who shows up in heavy armor. Beaten, he blows up himself and the drones, and Tony saves Pepper at the last second. They kiss. Hammer is arrested. Fury tells Tony he will only be a consultant for the Avengers. After the credits, Agent Coulson finds a giant hammer in New Mexico.