Disaster strikes during the next performance of the underwater escape. Borden ties, stops, and then reties the knot around Julia's hands as they prepare to put her on the hoist. She can't manage to slip the knot underwater, and Cutter isn't able to break the glass of the tank in time to save her. Julia dies onstage, leaving Angier devastated and Milton ruined. During the funeral, Angier confronts Borden, asking which knot he tied. His answer is that he "doesn't know," which Angier cannot accept. This is the beginning of their bitter rivalry.

Borden and Angier both strike out on their own, but there are obvious tensions. Borden marries Sarah and starts doing his own act, the climax of which is a bullet-catching trick. The secret, as Borden explains to his pregnant wife, is that the bullet is palmed, so that it's already in the magician's hand when the gun is fired. All that comes out of the pistol is gunpowder. But magicians have died during the trick because of audience members sticking buttons or their own bullets into the guns.

Borden is next seen performing for a very rowdy audience. After whipping out the gun to silence the audience, he asks for volunteers, then hands the gun to a man who is actually a disguised Angier. Angier, knowing the trick, deliberately puts his own bullet into the gun, and confronts Borden again about the knot he tied. When Borden's answer is still "I don't know," Angier shoots him, blowing the ends of two fingers off his left hand and jeopardizing Borden's career.

Sarah encourages him to quit magic. She isn't happy that Borden keeps secrets from her as part of his trade. Their marriage is an uneven one, and she claims that when he says that he loves her, she can tell on some days he doesn't mean it. Borden admits this is true and they make a sad little game of it: some days he loves her, some days he loves the magic.

One day at a bar, Angier is approached by Cutter, whom no one will hire because of his association with Milton. They start their own act, with Angier performing as "the Great Danton" (a name suggested by his late wife and rejected at the time for being "too French"). His lovely assistant is a blonde bombshell named Olivia Wenscombe (Scarlett Johansson).

Because Angier doesn't want to get dirty, Cutter comes up with a new version of the "disappearing-bird-in-the-cage" trick where members of the audience keep their hands on the cage as it disappears. The trick involves mechanical gadgetry that Angier wears under his suit to fold away and retract the cage. Best of all, the bird is unharmed.

Angier debuts the trick at his show. The audience is negative at first, complaining that they've seen the trick numerous times, but Angier says he'll make it a bit harder. He asks for two volunteers to come up from the audience. Two are selected: an elderly woman and a man who is actually a disguised Borden.

Although Angier recognizes Borden the moment he puts his hand on the cage, he is unable to stop Borden from jamming the machinery. The cage malfunctions, causing the bird to be killed onstage and the other volunteer's hand to be caught. The theater owner cancels Angier's booking and Angier's reputation is left in tatters.

Cutter sends Angier to a science lecture to get some new ideas. Nicola Tesla is preparing to demonstrate several huge, fantastic Tesla coils, generating immense electric charges that seem to fill the room. Because of the perceived danger, the demonstration is canceled by the authorities. But Angier spots Borden in the crowd and follows him, learning about Sarah and their new baby, Jessica. Fed by jealousy of Borden's happiness, which Angier feels should have been his, Angier's obsession over the rivalry grows.

Intercut with this storyline are Angier's attempts to meet with Tesla and commission his own transporter machine. Tesla has supplied all of Colorado Springs with electrical service in exchange for being allowed full use of the generators at night (when the residents are sleeping) to conduct experiments. He's even rigged up his own electric fence. When Tesla finally agrees to build the machine for Angier, he warns that it will take a great deal of time and money.

In Borden's diary, we learn that both magicians start performing again. Borden, as "the Professor," has a dramatic new trick called the Transported Man that has been getting him attention. Angier and Olivia, who is falling in love with her magician, watch it repeatedly and are unable to tell how he does it.

The trick appears amazingly simple: Borden gets into a cabinet on stage right and gets out of another cabinet on stage left. Cutter insists that he must be using a double, but Olivia insists that she can see the bandaged stumps on his left hand both when Borden disappears and when he reappears, even though Borden wears padded gloves to hide his short fingers.

Angier and Cutter copy the trick and add the bit of showmanship and flair that Borden's version is missing. In his version, Angier throws his hat across the stage and walks through a door on one side of the stage, secretly drops through a trapdoor hidden behind the door frame onto a padded cushion, while a double simultaneously is hoisted out of another trapdoor behind the door on the other side of the stage to catch the hat. They hire an out-of-work actor named Gerald Root (also played by Hugh Jackman) to be Angier's double. He's a drunk and a lout, but he can perform.

Their act, dubbed "the New Transported Man," is an amazing success. But there's one small drawback: Angier has to be the one who sells the buildup of the trick, so he's always under the stage during the prestige and misses out on the audience reaction. Root is getting all the glory, even if Cutter makes sure that he keeps a low profile so the secret doesn't get out. Even worse, Angier still doesn't know how Borden does his version of the trick.

Angier decides to send Olivia to work for Borden and spy on him to get the secret. Olivia, who is in love with him, doesn't like the idea, but does as Angier asks and becomes Borden's assistant. To gain his trust, she tells Borden how Angier's trick is done and offers to help him improve on his own act.

Meanwhile, a big problem develops -- with Root, of course. Root realizes that he can control Angier because he's necessary for Angier's biggest trick, and demands money. It turns out that Borden has been influencing him, and Cutter thinks Olivia may have betrayed them. Borden's version of the "Transported Man" has improved, and now includes one of Tesla's electricity-generating machines. Cutter gets Angier to agree to phase out the trick.

Root's performances get more intentionally sloppy, and one night he simply isn't there at all. When Angier goes through the trapdoor, the cushion to break his fall has been removed, and he breaks his leg. He watches Borden pop out of Root's trapdoor and proceed to humiliate him, suspending a tied-up Root from the ceiling with an advertisement for Borden's own act, before running out of the theater to his own show.

Angier confronts Olivia, who insists that Borden's trick is accomplished using a double, because she's seen makeup and wigs lying around. He deduces that such items are planted by Borden as misdirection for her. When he questions her loyalty, she produces Borden's encrypted diary as proof that she didn't betray him. However, the five-letter-word to decrypt the diary is still necessary. Angier and Cutter kidnap Fallon, Borden's engineer, and nail him in a box to hold for ransom.

When Borden comes to the meeting place in a cemetery to get Fallon back, Angier demands to know the secret of Borden's "Transported Man" in exchange. Borden writes down one word, "Tesla," which will decode the diary, and suggests that he's teleporting using a machine Tesla built. Borden is then told that Fallon has been buried alive, and Angier asks him how fast he can dig.