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The story opens with Eye of the Tiger during the climax of Rocky Balboa's rematch against Clubber Lang, where Rocky defeated Lang with a KO to regain his title. The picture then fades and we see Apollo Creed presenting his favor to Rocky shortly after the Lang fight for helping him train. Rocky returns to his home to celebrate Paulie's birthday and shows evidence of a punch from Creed. It is also Rocky and Adrian Balboa's (almost) 9 year wedding anniversary.

Meanwhile, Ivan Drago (Dolph Lundgren), a highly intimidating 261 pound Soviet boxer, arrives in America with his wife Ludmilla (Brigitte Nielsen), an Olympic gold medal swimmer, his manager, Nicolai Koloff (Michael Pataki), and a team of trainers headed by grizzled Russian coach Igor Rimsky (George Rogan), and the Cuban Manuel Vega (James "Cannonball" Green") to challenge the best American fighters. Koloff takes great pride in showing off the giant's gym to the American press. Koloff goes on at great length at how all of this aids in improving his performance, while Drago, hooked to electrodes and computers, waits for an order to be given. To illustrate the point Drago throws punches at a machine that measures the hit's strength, regularly exceeding 1850 psi per punch.

Seeing Drago on TV, Apollo Creed, motivated by patriotism and a desire to prove himself after five years of retirement, quickly jumps at the chance to step back into the ring in an exhibition bout against Drago. Despite apprehension from Rocky, who eventually agrees to help train him, Apollo sets the match between himself and Drago in Las Vegas. Before the exhibition, Apollo and Drago's camps hold a press conference. When Drago's wife Ludmilla makes a comment about the fight, Apollo is offended and gets into an argument with Koloff, who tells Apollo he is too old to think he can win. With Rocky in his corner, Apollo flamboyantly makes an even bigger show than when he first fought Rocky - including fireworks and a patriotic theme. Before the match begins, Creed offers to put his gloves up with Drago, not fully realising the strength of him. Starting the fight in his trademark manner, Drago manages to catch him off-guard very quickly as he batters Apollo with a series of devasting punches. At the break, Rocky pleads with Apollo to quit the fight, but Apollo is determined to finish, which only leads to tragedy when he collapses and dies in Rocky's hands from Drago's continuous blows.

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