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. He 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.