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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 Peninsula, a vibrant, mountainous wilderness.
Up until 1955, it was home to over 100,000 people, including 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".
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.(src: 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.(src: 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, establishing the Olympic Exclusion Zone - or the Zone - and what would be known as the Deep Zone, 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.(src: Frequency File #2, Part 2)
The boundaries of the Zone were expanded once in 1961, originating the Mid Zone, and once again in 1967, originating the Outer Zone.
In 1973, as a result of a catastrophic energy burst at a LIM technology fair, the entire town of Sierram was destroyed and Colossal Cappy was formed.
According to Francis Cooke, ARDA lost its funding, thus the organization then fired all of its staff and ordered everyone to evacuate the Exclusion Zone. The zone was officially sealed by 1987.
In 1998, The Driver is warped into the Zone and the events of Pacific Drive begin.
Geography
The zone is segregated into three sections, each surrounded by a 500 meter tall wall. Sections are further subdivided into Sectors, lettered A to G and skipping over to R, which are then divided into Junctions, taking their Sector letter and adding a number to it (ex. E1, R4). There are six different types of environments occuring in the Zone, known as Biomes, there being two Biomes per Section.
Outer Zone
The Outer Zone is the most stable, recent, and largest section of the Olympic Exclusion Zone. It was established in 1967 and includes: Sector E (Southeast), Sector F (Northeast), and Sector G (Southwest).
This section of the zone is separated from the Mid Zone by the Expansion Wall and the outside of the Zone by an unnamed outer wall.
Its big story location is Sierram.
Outer Zone junctions use the 
Blistering Woods and 
Damp Forest biomes.
Mid Zone
The Mid Zone is the middle section of the Zone. It was established in 1961 as the first expansion of the Zone's original borders. It includes: Sector B (North, a single highway junction), Sector C (Center) and Sector D (West).
This section of the zone is separated from the Deep Zone by the Old Wall and the Outer Zone by the Expansion Wall.
Its big story location is the Red Meadow Research Facility.
Mid Zone junctions use 
The Mires and 
The Scorch biomes.
Deep Zone
The Deep Zone is the original and most unstable of the sections. It was established in 1955 and includes: Sector R (Northwest) and Sector A.
This section of the zone is separated from the Mid Zone by the Old Wall.
Its big story location is the Well.
Deep Zone junctions use the 
Red Spires and 
Smokestacks biomes.