Tony Stark discovers that the palladium cores powering his chest reactor are degrading at an accelerating rate, steadily poisoning his bloodstream with lethal toxins. Convinced he is going to die, Tony transfers control of Stark Industries to Pepper Potts and engages in increasingly reckless behavior. At the Monaco Historic Grand Prix, Ivan Vanko attacks Tony on the track using whip-like electric conduits powered by a homemade miniaturized arc reactor. Stark defeats him using his portable Mark V suitcase armor, but the illusion of Iron Man’s singular technological monopoly is broken.
Rival CEO Justin Hammer breaks Vanko out of prison to build a fleet of armored military drones. Tony’s spiral culminates in a drunken brawl in armor against James Rhodes, who takes the Mark II suit and hands it over to the U.S. military (which Hammer outfits with heavy weaponry to create War Machine).
Nick Fury places Tony on house arrest and provides archival materials from Howard Stark. Tony deciphers a hidden atomic structure embedded in the 1974 Stark Expo layout. Using a home-built particle accelerator, Tony synthesizes a brand-new element (Vibranium/Badassium isotope), replacing palladium and saving his life.
At the Stark Expo, Vanko overrides Hammer's drones and War Machine's suit, launching a mass attack. Natasha Romanoff infiltrates Hammer Industries, rebooting Rhodes’ suit and restoring his control. Stark and Rhodes team up in the Expo’s Japanese garden, destroying the drones and defeating Vanko in an armored suit by combining their repulsor blasts. Vanko self-destructs, but Tony rescues Pepper just in time. In the epilogue, Fury informs Tony that while Iron Man is accepted into the Avengers Initiative, Tony Stark himself is deemed "unsuitable" due to his personality, hiring him only as an informal consultant.