After killing one of his deputies, Tuco kidnaps Walter and Jesse , planning to take them to a superlab in Mexico after the DEA raids his operation in Albuquerque. After an unsuccessful attempt to poison Tuco with a small amount of ricin that Walter had synthesized, the two manage to incapacitate Tuco and escape. Hank , in his search for Walt, has tracked Jesse's car and comes across a wounded Tuco. A shootout occurs, resulting in Hank killing Tuco. Walter engineers a return home, claiming to have been in a fugue state, but this excuse has numerous holes and creates an uneasy distrust in his relationship with Skyler. The DEA seizes Jesse's "drug" money, putting a strain on his partnership with Walter after he demands half of Walter's meth profit to save himself from homelessness.
Jesse rents a new place and becomes romantically involved with his landlord's daughter, Jane , a recovering heroin addict. With Tuco dead, Walter and Jesse decide to move their business into new territory, but more problems arise as their enterprise expands. One of their dealers, Skinny Pete, is mugged, so Jesse is forced to confront the perpetrators. One of the addicts is killed by his girlfriend, but Jesse receives the credit, earning him fear and respect and further solidifying the reputation of "Heisenberg" in the area. Another dealer, Badger, is arrested by the Albuquerque police, forcing Walter to deal with Saul Goodman , a crooked lawyer who offers a solution to keep Badger from snitching while also keeping him out of prison. Walter and Jesse attempt to intimidate Saul, but Saul makes a deal with Walter for a cut of the meth profit in return for being Walter and Jesse's legal counsel and advisor in their drug operation.
Considered a hero for killing Tuco, Hank is promoted and sent to El Paso. In private, he suffers panic attacks due to the unexpected shootout with Tuco. El Paso unsettles Hank after he witnesses the severed head of a DEA informant attached to the back of a tortoise set to explode. The IED also kills a Federale and severely injures three fellow DEA officers. Hank is immediately sent back to Albuquerque by his superiors. Gretchen , Walter's former lover and executive at Gray Matter, discovers Walter has been lying to his family about the money for his cancer treatment. She is horrified when an angry and bitter Walt blames her and her husband, Elliott , for profiting off his research, although she doesn't disclose Walter's secret for his family's sake. Skyler goes back to work for Ted Beneke , her former boss who apparently groped her at a holiday party when drunk, and caused her to quit her bookkeeper job. She increasingly relies on Ted for emotional support due to Walter's frequent absences and unexplainable behavior.
Walter believes his cancer has worsened when he sees a dark area on the latest PET/CT scan of his lungs. With only $16,000 remaining of the meth money after the numerous setbacks, he and Jesse spend several days in the desert cooking 38 pounds of meth to sell off before Walter dies. Later, at the doctor's office, Walter discovers his cancer has not spread and his tumor has actually shrunk by 80%; the dark area on his lung was only inflammation. Walt plans to end the meth operation after the 38 pounds are sold, but soon finds his mundane life boring and continues to seek out dangerous situations.
When one of Walter and Jesse's dealers, Combo, is killed by rival dealers, Jesse is sent spiraling into a drug addiction that also drags Jane out of her sobriety. With their remaining dealers backing out, Walter and Jesse turn to Saul for help. Saul uses his connections' connections to arrange a meeting at a fast food restaurant with Gus , a discreet, cautious, yet successful drug distributor. Unbeknownst to Walter, Jesse, or Saul, Gus owns and manages a number of fast food restaurants and has purposely scheduled the meeting at one of his own restaurants in order to observe Walter and Jesse. Jesse arrives for the meeting late and high on drugs and leaves the restaurant after briefly arguing with Walter. Having seen this, Gus deems them unreliable and chooses not to approach Walter, who initially assumes that Gus has stood them up. Walter eventually deduces that the owner of the restaurant was in fact the man they were to meet, and later approaches him for a second chance. Gus reluctantly offers to buy Walter's product for 1.2 million dollars and offers him only one hour to deliver the drugs. Walter attempts to contact Jesse to complete the exchange, but he and Jane are incapacitated after an injection of heroin. Walter is able to revive Jesse long enough to get him to tell Walter where he has hidden the product. Walter is forced to carry out the trade himself just as Skyler goes into labor. He manages to complete the transaction at the cost of missing the birth of his daughter.
Walter loses trust in Jesse and promises to give him his share of the payout only if he agrees to get sober. Upon learning of the money and Jesse's relationship with Walter, Jane concocts a plan to blackmail Walter and convinces a reluctant Jesse to go along. Jane calls Walter and threatens to turn him in to the authorities if he doesn't give Jesse his share of the money. Walter reluctantly complies and the two agree to go their separate ways, but Walter feels obligated to help Jesse. Coincidentally, he meets Jane's father Donald in a local bar. Unaware of their mutual acquaintances, the two men share perspectives on the challenges of raising children, a subject Walter raises by describing his troubled "nephew." He returns to Jesse, only to discover that he and Jane have taken heroin again. After attempting to awaken Jesse, he intentionally allows Jane to asphyxiate in her own vomit. When Jesse wakes up, he tries to revive Jane without success. Unaware of Walter's visit, Jesse believes he is responsible for her death and spirals into a depression. Walter attempts to help Jesse by taking him to a drug rehabilitation clinic. Meanwhile, Gus discovers that Hank is Walter's brother-in-law and that Walter has cancer.
As Walter undergoes anesthesia for his lung cancer surgery, he accidentally confirms to Skyler the existence of his secret second cell phone. This prompts her to leave him several weeks later, after she systematically investigates and uncovers his lies. Walter offers to explain everything to Skyler, but she responds that she is too afraid to know the truth. After Skyler leaves, Walter sees an explosion in the skies above his home. A grieving Donald, an air traffic controller, has mistakenly directed two airplanes into each other in the sky above Albuquerque. In an image foreshadowed throughout the season, a charred pink teddy bear lands in the Whites' pool and floats there until it is collected as evidence by NTSB agents.
