The story of X-COM begins in 1998. The initial plot centers around increased reports of UFO sightings. Tales of abduction and terrorism by the unknown aliens become widespread. The nations of the world come to perceive this as a threat and attempt to form their own forces to deal with this, such as Japan's Kiryu-Kai; these forces fail miserably, the Kiryu-Kai not intercepting a single UFO in its five months of operation. On December 11, 1998, representatives from some of the most powerful nations in the world meet in Geneva, Switzerland, to discuss the issue. From this meeting was born the Extraterrestrial Combat Unit—X-COM, which the player takes control of during the course of the game.
On January 1, 1999, X-COM's first base became operational, beginning what would later become known as the First Alien War - a period of time lasting three years. Hundreds of UFOs were intercepted, but forces sent to clean up the crash sites took heavy casualties. Major cities came under attack by the alien forces, and at one point the alien forces even began establishing bases on Earth itself. From these sites, however, valuable knowledge and artifacts were recovered; aliens from several distinct species were captured, studied and eventually interrogated, and their technology was reverse-engineered and put to use by X-COM forces.
In later years, the major breakthrough came—an interrogation revealed the alien's forces were based in Cydonia, on Mars. A heavily armed and armored strike force was sent to Mars in X-COM's Avenger craft (based on alien technology) and managed to destroy the alien brain creature that was apparently responsible for masterminding the entire operation. Shortly before the Cydonia base was destroyed, however, a mysterious transmission was beamed back to Earth from the wreckage of the base, setting the stage for the sequel.
Gameplay starts on January 1, 1999, with the player choosing a location for their first base on the Geoscape screen. The Geoscape screen is a representation of the world, which displays X-COM bases and craft, UFOs, alien bases, and sites of alien activity (alien terror sites). The player can choose from here to deploy X-COM craft to either patrol designated locations, intercept UFOs, or land at a UFO crash site, landed UFO, alien terror site, alien base, or (when research allows) the alien's main base.
Clicking on a base on the Geoscape screen takes the player to the base screen. From here, the player can purchase weapons and other equipment, recruit soldiers, scientists, or engineers, build expansions to the base, build new bases (up to eight in total may be complete), and organise research and production.
Funding for the above is provided by the ten founding nations of X-COM. At the end of each month, a funding report is provided, where nations can choose to increase or decrease their level of funding based on their perceived progress of the X-COM project. Alternatively a nation can sign a pact with the aliens which results in withdrawal of all funding by that nation to the X-COM project.
When a craft is sent to land at a UFO crash site, landed UFO, or alien terror site, the game shifts to a tactical phase known as the Battlescape. Here the player commands their soldiers against the alien forces in an isometric turn-based battle sequence. One of three outcomes is possible in this phase: either the X-COM forces are eliminated, the alien forces are eliminated, or the player chooses to withdraw. These battles lead to recovery of alien artifacts which can then be researched and possibly reproduced at the X-COM bases, and can also lead to the recovery of live aliens which may then be assigned as a research project to produce information, possibly leading to new technology.
The game may end in several ways. If the player's performance (as judged by the founding nations) is poor for two consecutive months, the player runs a deficit for two consecutive months, or all the player's bases are captured the game ends in defeat. If the player mounts an assault on the alien's primary base and loses, the game ends in defeat. If, however, the player is victorious in the final assault, the game ends in victory.