At what he believes is his final birthday, Stark gets drunk while using the Iron Man armor, forcing his friend, U.S. Air Force Lieutenant Colonel James Rhodes, to intervene. Rhodes puts on Stark’s Mark II armor and battles Stark. The battle ends when the two fire repulsor beams at each other, creating a large explosion. After fighting Stark, Rhodes delivers the armor to the U.S. military. Nick Fury, S.H.I.E.L.D.’s director, approaches Stark and reveals Rushman as agent Natasha Romanoff and that Howard Stark was a S.H.I.E.L.D. founder when Fury knew him personally. Fury gives him some of his father’s old material; a hidden message in the diorama of the 1974 Stark Expo proves to be a diagram of the structure of a new element. With the aid of his computer J.A.R.V.I.S., Stark synthesizes it. Vanko soon reveals to Stark that he is still alive and seeking revenge so Stark used the untested element instead of the palladium.
At the Expo, Hammer reveals Vanko’s armored drones, led by Rhodes in a heavily weaponized version of the Mark II armor. Stark arrives in his new suit to warn Rhodes, but Vanko seizes control of both of the drones and Rhodes’ armor and attacks Iron Man. Hammer is arrested while Romanoff and Stark’s bodyguard attempt to capture Vanko. He escapes, but Romanoff returns control of the Mark II armor to Rhodes.
As soon as Stark and Rhodes defeat the drones they confront Vanko himself, who is now in a new and powerful suit of armor. Neither can defeat Vanko on their own, but Vanko is ultimately defeated when they fire repulsor rays at each other. With his suit too damaged to continue the fight, Vanko activates his suit’s self-destruction mechanism. Stark saves Pepper from the exploding drones’ remains, who then quits as CEO.
At an interview, while news footage of a rampaging Hulk plays, Fury informs Stark that while Iron Man is a suitable candidate for the “Avengers initiative”, he himself is not. Stark agrees to serve as a consultant if Senator Stern acts as a presenter at a ceremony planned for awarding Stark and Rhodes with medals for bravery, which Stern hesitantly does. Later, Agent Coulson from S.H.I.E.L.D. reports the discovery of a large hammer at the bottom of a crater in a desert in New Mexico.
Janek Sirrs was the film’s visual effects supervisor, and Industrial Light & Magic once again did the majority of the effects, as it had done on the previous film. ILM’s visual effects supervisor on the film, Ben Snow, said their work on the film was more difficult than their work on the first film because director Jon Favreau asked more of them this time around. ILM created 527 shots for the film using multiple different programs. They also created gadgets, such as Tony Stark’s transparent LG smartphone, the backdrops for the Stark Expo, and the computer screen interfaces on the touch-screen coffee table and the holographic lab environment. Altogether, 11 visual effects studios worked on the film.