Hammer breaks Ivan out of jail, where he is presumed dead and immediately gets the Russian to work on his $1million a pop small army of Iron Man replica suits. Ivan's plan is to take out any human error, so that the suits are drones controlled by a central computer.
Since Rhodey stole one of the Iron Man prototype suits after Tony was wasted at his own birthday party, the suit is taken to a US army base where Hammer will be in development on a DOD variety.
Meanwhile Tony is approached by Nick Fury (Samuel L Jackson) from SHIELD, who reveals that Scarlett Johansson is in fact a double agent sent in by SHIELD to assess his ability. Fury hands Tony a chest from his late father, that will hopefully point to something big he was working on.
Back in the mansion, Tony watches some old film footage of his old man - who speaks to him from the past, and using the diorama of the Expo landscape he realises that the central piece is the chemical composition of a new element. He sets about developing a high powered ray-gun to complete the transformation of the new mineral, and when finished he has a new source for his power that is more powerful than before - with the added benefit that it will not poison his blood.
Tony is pretty happy with himself, until he gets a call from Ivan, who is still alive, telling him that something big is going down.
At the Stark Expo, Hammer dances out onto the stage and introduces his army, navy, airforce and marine platoons of drone soldiers - with the Iron Man silver suit as the main piece, worn by Rhodey. The real Iron Man flies onto the stage to warn them ... but suddenly Ivan flicks the switch and the drones turn nasty. Rhodey cannot control his suit as they are manned remotely and race after Iron Man, destroying everything in their path.
Pepper leads the cops to Hammer, and with the onsite IT team try to fix the firewall security breach. Scarlett Johansson grabs Jon Favreau and they drive over to Hammer's factory to take on Ivan. They knock a few guards unconscious, but Ivan has already long gone. They manage to free up Rhodey's suit, leading to the final battle.
The two Iron Men are surrounded by the remaining drones, but with a few modded weapons including lasers and high-powered rockets they make easy work of it. Suddenly a bigger Iron Man lands in the Expo park - Ivan shows his face and breaks out his laser whips again.
The good guys have a hard time against the wrestler, but they manage to use the two-way thruster technique to knock Ivan off his feet. Just when they are about to bust him, he sets a self-destruct on his suit 'Predator' style and they fly out as fast as they can, picking up Pepper on the way as all the drones explode.
Tony and Pepper share a kiss on a roof, watched by Rhodes.
Later, Tony meets Nick to hear Scarlett's assessment - to be told he is not ready to join The Avengers, but that he can help on a consultancy basis. He tells Nick that they couldn't afford him - unless he asks for a favour in return.
Tony and Rhodes are presented with medals at a large ceremony - presented to them in person by the Senator from the hearing before that hates his very being.
Extra scene - after the credits, the agent guarding Tony at his mansion, who did a terrible job, is sent to New Mexico. When he arrives at the site there is a huge crater with a few trucks surrounding it (including a Clark Kent Smallville-style red one as a red herring). It then shows something that looks like one of the drones, but apparently is supposed to be the Hammer of Thor. It's not very clear, and definitely not worth sticking around through 10 minutes of credits about limo drivers, best boys and tea maids for!!