Jackie Sumpter is a young woman who works in the kitchen of Rosewood Mental Hospital, being forced to work the night shift one dark night. As per her orders, Jackie prepares a special tray for a patient in Room 101, which is in a restricted hallway only a certain orderly can access. After delivering the tray, Jackie cuts herself and has to find help from a nurse she finds wandering the hallway. (Jackie notes that this nurse is dressed in an old-fashioned white nurse's uniform and has a scar on her chest.)
On her way back to the kitchen, Jackie finds a wounded orderly who gives her a black doctor's bag and urges Jackie to flee, warning her of the nurse. The nurse sees this and begins a frightening chase of cat and mouse with Jackie, who must somehow find a way to escape the facility while avoiding the nurse.
Through documents found, the player can uncover the history of the nurse and the truth behind her rampage. A nurse during the 1950's, Madeline Derwent became over-stressed at her job and attacked an abusive patient at the hospital she worked at. Admitted to Rosewood to be psychologically analyzed for her court hearing, Derwent was approached by one of the doctors- Dr. Strauss. In exchange for her help with a secret project of his, Strauss promised to help Derwent escape conviction by lying on her psychiatric report. After taking the offer, Derwent discovers that the project centers on immortality that manifests with certain criminally insane people (a la slasher villains). During this, Derwent falls obsessively in love with Strauss.
Meanwhile, the FBI, investigating the dozens of patients that went missing following a tip from another asylum doctor, catches onto the operation, which Rosewood's original owner facilitated in hopes of saving himself from a terminal illness. Assisting the FBI is a "certain foreign group" looking into Strauss, who did some "government work back in the old country a decade before" (implying that Strauss was a former Nazi/Nazi collaborator). While escaping their underground lab, Strauss became trapped under some rubble, Derwent decapitating him (both were immortal now) and fleeing with his head.
Derwent was found weeks later and, in a display of her immortality, removed her heart in front of shocked FBI agents. Having Strauss's head taken from her, Derwent is locked away in the asylum (being the patient in Room 101) and is forced to help the owner/his son obtaining a flawed from of immortality (they stop aging around fifty), in hopes of having the doctor returned to her. However, a bribery gone wrong results in the nurse's escape/events of the game.
In the final confrontation, the player discovers the actual contents of the black bag: Strauss's head, rather than Derwent's heart. The end depends on the player's actions/how much info they found/where they're at during the final confrontation, the canon one being Derwent leaving Rosewood with Strauss's head and Jackie writing about the events of the night.