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What it is
Vault 101 is where The Lone Wanderer grew up. Located near Washington D.C., next to the town of Springvale, it was one of the very few vaults that was actually intended to shelter it's inhabitants, rather that other vaults, which had the purpose of examining what would happen if the door wasn't closed properly, or if the residents were allowed free access to the Vault Armoury.
History of the Vault
*WARNING: EARLY GAME SPOILER ALERTS*
The Vault has been closed off from the world for the past 200 years, with occasional contact with the outside world, mostly through radio transmissions. A few people have escaped over the years, and a scouting party was even sent out.
Soon after the current Overseer, Alfonse Almodovar came into power, James and his young child, later known as The Lone Wanderer, came to the vault door. James agreed to become the vault physician, and in return he and his child got entry to the Vault.
The Lone Wanderer the rest of his generation grew up believing that "You're born in the Vault. You live in the Vault. You die in the Vault.", and so never really wondered what's on the outside, having been told that it's much too dangerous to survive.
However, on August 17th, 2277, the vault got an infestation of Radroaches. Taking this opportunity, James fled the Vault, leaving a message for The Lone Wanderer with his assistant, Jonas Palmer. The Overseer discovers this, and starts questioning Jonas, who is killed by Security Officer Stevie Mack.
The player is woken up by Amata Almodovar, the Overseer's daughter, and longtime friend. She explains the situation, and how the player must escape the Vault.
Despite the best efforts of the Security team, the Player escapes, after a saying goodbye to Amata at the doorway.
Afterwards, the truth of the nature of the Vault is found out. The various entrances and exits over the years become common knowledge, and a new crisis begins between the Vault Dwellers wanting to see the outside world, and the increasingly oppressive Overseer.
After a while, Amata changes the password on the door to her name. and begins sending out emergency help signals, hoping to get The Lone Wanderer to return and help.
When they do, they find the Vault in a very different state. The security has become very oppressive, and if the player killed the Overseer the first time around, Allen Mack is the new Overseer.
The Player can do various thing to help the Vault, including convincing the Rebels to shut the Vault off forever, convincing the Overseer to open it to the world, or even forcing the entire population out, and into the world above.
===Details about Vaults in general==
The Vaults were designed by Vault-Tec, massive structures built underground, but the Vaults were never made to save anyone. In Fallout 3, there are 4 other vaults, often playing a part in a quest, and one of them plays a major part in the main story line. They often contain some kind of useful or valuable items to scavenge, though are inhabited in the same way as Vault 101.
Nearly all of the Vaults that were built were build for some kind of odd social experiment, rather than saving the inhabitats. The experiments were often strange, or sick, or sociopathic, or a combination. Vault 101 was to see the effects that an omnipotent dictator (the Overseer) would have on a small, closed community, as Vault 101 was never meant to be opened. Vault 87 was a research and testing lab for the Forced Evolutionary Virus. Vault 108 houses a cloning lab, and is solely inhabited by the clones of man, named Gary. In Vault 106, pyschoactive drugs were released into the air, and Vault 92 made use of white noise to implant post-hypnotic suggestion of a violent nature into the minds of the inhabitants
Vault 101 is located more or less in the middle of the game map, close to the Potomac River. The Vault was built into a cliff, right outside the town of springvale. In the post-war world, the town of Megaton has sprung up very nearby, centered around the crater of an atomic bomb.
Vault 77 and the Puppet Man
A popular story regarding the Vaults is that of "The Puppet Man", a comic published by Penny Arcade.
One of the Vaults was intended to examine the effects of extended isolation with only a crate of puppets as company. A lone man entered Vault 77, and the door was locked. After the initial shock at being stuck on his own, he started to play with the puppets. One was a king, so he named it "The King". Another was a Grandmother, and so earned the title "Grandma". A third was a dog, who was part time sheriff, part time revered for the vault, and became known as "Reverend Hound". However, there was a fourth Puppet, one of Vault-Boy, who started talking to him, something the other puppets didn't. The next morning, The King is found dead. The Puppet Man confronts Vault-Boy, who tell him they did it together, and that they must flee before Reverend Hound gets them. Outside, he meets an Ant, named "Mr. Pinch", who becomes his steed. Later, he is captured by Raiders,and warns them to beware the puppet, as he is crazy, and has killed before. While debating what to do with him, one of the raiders runs up to main group, and claims that his companion has been killed. The comic ends with the Puppet Man standing in a pile of dead raiders, covered in blood.
Comic can be found here.