While Volume 1 is intended to take place within the fictional universe of the Blair Witch Project, the game is technically also a sequel to Nocturne, the game for which the trilogy's engine was originally developed. Elspeth "Doc" Holliday was a minor character in Nocturne, with several other characters from that game also appearing, including Master Khen Rigzin, Coronel Hapscomb, General Biggs, an unnamed secretary, Svetlana Lupescu, and The Stranger appearing at the start of the game. The Stranger reappears later in the game, on the fourth day, as the player's partner. Some enemies from Nocturne such as bat-like creatures and a werewolf also appear in the beginning of the game in the training session).
The story takes place in the year 1941, and with the exception of the opening section in the Spookhouse HQ, the game takes place over four days. Research scientist Elspeth "Doc" Holliday is dispatched to the town of Burkittsville by the Spookhouse, a fictional classified government agency charged with investigating paranormal occurrences.
It is reported that during the early 1940s, a hermit named Rustin Parr abducted seven children from Burkittsville and, apparently without motive, murdered all but one in his basement. He forced the surviving child, Kyle Brody, to stand in a corner and listen to the screams of the children being tortured and murdered. Afterwards Rustin Parr left his house in the forest, walked into town, and said to a local shopkeeper, "I'm finally finished."
The player must guide Holliday through her investigations, to see if there is any truth to Parr's claims that he was under the influence of otherworldly forces when he committed the murders. The investigation includes conversing with inhabitants of the town and analysing clues. Action sequences occur intermittently in the woods where the legendary Blair Witch is rumored to live, as well as in nightmare sequences in which the inhabitants of the town seem to become Daemites (demonic zombies). The story of Rustin Parr, minus the involvement of Holliday, was described briefly in The Blair Witch Project, and more fully in the pseudo-documentary Curse of the Blair Witch, which accompanied the DVD release of the film.
The main antagonist of the series is not actually the Blair Witch, but a demon called Hecaitomix. It's explained through the game and the series that this demon controlled and possessed others, like Elly Kedward, and (through Kyle Brody) influenced Rustin Parr.
The game contains references from David Lynch's Twin Peaks. There are several references in the game, most notably Dale Cooper making a cameo appearance in the Burketsville Diner, directly using quotes from the television show ("Damn fine cup of coffee... and Hot!"). His name is given as "Dale" only when chatting to him while the town sherrif is present.