The Olympic Exclusion Zone, also casually referred to as "The Zone", is the setting of the game. It describes a massive 3,600 square mile area in Northwest Washington State called the Olympic Penisula, a vibrant, mountainous wilderness.
Up until 1955, it was home to over 100,000 people, including one Dr. Ophelia Turner. With claims of eminent domain, the Zone was sealed off by a brand-new secretive governmental agency called ARDA - under the guise of national security - shortly after the discovery of an ambiguous, yet promising, technology known as LIM.
This series of events shares similarities to U.S. Government nuclear research programs in the 1950's. See Los Alamos aka "Project Y".
Spoilers ahead
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History
The Peninsula's history was fairly unremarkable up until the year 1946. It was then that Dr. Ophelia Turner made a breakthrough - the first in an otherwise underwhelming career - in her basement laboratory. Allegedly, this was the moment she produced the first ever LIM wave, modulated radio waves with almost supernatural properties.(source: Chiaki Saruhashi, Frequency File #2, Part 2)
After Dr. Turner's discovery of LIM waves, she and a few fellow scientists living on the Peninsula spent four years testing the limitations and utility of the waves.(source: Chiaki Saruhashi, Frequency File #2, Part 2) There is little information regarding the five years between 1950 and 1955, but it is assumed that Dr. Turner spent that time further tinkering with her discovery and possibly showcasing it to various government officials.
By 1955, the federal government had taken notice of Dr. Turner's LIM technology and their interest became apparent immediately. They seized Dr. Turner's home - as well as the area around it - and placed the concept of LIM technology under the strictest confidentiality.
A new governmental branch, ARDA (Advanced Resonance Development Authority), was established and tasked with cordoning off the Peninsula and using it as ground-zero for further experimentation into LIM technology.(source: Chiaki Saruhashi, Frequency File #2, Part 2 and Frequency File #3, Part 5)