In South Boston, Colin Sullivan is introduced to Irish Mob boss Frank Costello. Twenty years later, Sullivan has been groomed as a spy inside the Massachusetts State Police (MSP) and joins the Special Investigations Unit, led by Captain Ellerby. Another recruit, State Trooper Billy Costigan Jr., is approached by Captain Queenan and Staff Sergeant Dignam to go undercover and infiltrate Costello's crew. They set up a cover: Costigan serves time in jail on a phony charge and eventually joins Costello's crew. Ellerby informs Special Investigations that only Queenan and Dignam will know their undercovers' names and that Costello's crew has stolen computer microprocessors to sell to a Hong Kong Triad. Due to being undercover, Costigan's emotional state declines, but Queenan and Dignam plead with him to keep his cover.

Sullivan begins a romance with police psychiatrist Dr. Madolyn Madden. The MSP prepares to catch Costello selling the microprocessors; however, Sullivan tips off Costello about the police presence causing the deal to occur off-camera, allowing everyone to escape. Costello realizes there is a spy in his crew and tasks Sullivan to uncover his identity. Sullivan asks Costello for information to cross-reference his crew members in the MSP database. Meanwhile, Costigan learns that Costello is a protected FBI informant, and Costello accuses Costigan of being the spy within his crew, which he denies. Costigan shares his discovery with Queenan and warns that Costello is aware of a spy within his crew, and tells Dignam that there's spy in the MSP. Other than Queenan and Dignam, Costigan’s only contact in the MSP is Madolyn Madden, Sullivan’s girlfriend, with whom he later has an affair.