Film addict Dawson is making an amateur movie with his friends Pacey and Joey when filming is interrupted by the arrival of beautiful Jen, the granddaughter of Dawson's next-door neighbor. Pacey develops a crush on Tamara Jacobs (Leann Hunley), an older woman he meets at the video shop, but is stunned to discover that she is his new English teacher. As the friends start high school, Joey discovers Dawson's mother, Gail, is having an affair, a fact that neither Dawson or his father, Mitch, know.
Dawson casts Jen as the new leading lady in his film, but creates a messy off-camera scene during her date at the school dance. Meanwhile, Joey lets Mrs. Leery know she knows about her liaisons and Pacey gets under Tamara's skin with his public flirting. They kiss for a second time.
While working on the film class's movie, Dawson has a hard time. Meanwhile, his plan to give Jen the "perfect kiss" at the end of his own filming is interrupted when she discovers a secret. Joey is swept away by Anderson Crawford (Ian Bohen), a wealthy boy whose family has docked their sailboat in Capeside. Pacey angles for extra tuition with Tamara and she calls his bluff after class resulting in him admitting he is a virgin and Tamara sending him away.
Dawson learns of his mother's affair, and upon discovering that Joey already knew, he turns to Jen for comfort and advice. He regrets doing so when she tells him about her past and the real reason she moved to Capeside. Meanwhile, Pacey reveals to Dawson that he lost his virginity to Ms. Jacobs.
When a major hurricane moves inland, several characters take refuge in the Leery home, where Dawson rages at Jen about her past, and Mitch storms out after Gail confesses to her affair. A tormented Dawson is left to deal with the fallout. Elsewhere, Pacey conducts sabotage as his brother Doug (Dylan Neal) attempts to secure a date with Ms. Jacobs when they are all trapped at her beach house during the hurricane.
Another student overhears Pacey and Dawson discussing Pacey's relationship with their English teacher, and within hours the rumors are all around school and the rest of Capeside. Ms. Jacobs and Pacey find themselves in legal trouble before the day is out. Over at Dawson's house, Bessie gives birth to baby Alexander, aided by Joey, Dawson, Jen, and an unlikely ally, Evelyn Ryan.
Dawson, Pacey, Joey and Jen all wind up spending a Saturday in detention at Capeside High under the supervision of Mrs. Tringle, the school librarian. The day takes on a "Breakfast Club" type air as Abby Morgan (Monica Keena), the school trouble-maker, stirs the pot by initiating a telling game of truth or dare to break up the monotony of the day. Joey's secret longing for Dawson threatens to reveal itself.
Dawson feels the heat when Jen is visited by Billy Conrad (Eion Bailey), an old boyfriend from New York. Elsewhere, a guy creeps on Joey at a beach party and she is almost sexually assaulted, saved only by Pacey's intervention. In the Leery family, tensions between Mitch and Gail reach boiling point as they attempt to rebuild their marriage.
Hoping to get over Jen, Dawson agrees to skip school and join Pacey and Billy on a road trip. The three of them end up in a bar where Dawson finds some emotional clarity. Meanwhile, Jen handles damage control after Joey becomes the subject of a wild rumor at school concerning her having sex with a boy named Warren (Eric Balfour). The two of them join forces to perpetuate an act of revenge for the slander.
A double date finds Jen and Cliff (Scott Foley) joined by Dawson and Mary-Beth (Megahn Perry), whom Dawson asks out solely to make Jen jealous. Pacey and Joey work together on a school project, with a strange turn of events leading Pacey to admit possible feelings he may have for Joey. He later discusses this with Dawson, who is passionately against Pacey pursuing his emotions.
Friday the 13th dawns in Capeside, and Dawson plans a séance for the group. While shopping for supplies for the evening, they meet a distressed woman (Jennifer McComb) in the middle of a nasty row with her boyfriend. She accompanies them back to Dawson's house. In addition to being spooked by the woman and the séance, emotions are heightened by the knowledge that a serial killer may be headed towards Capeside.
Capeside's annual Miss Windjammer beauty pageant gets turned on its ear when it draws some unexpected contestants. Jen tries to persuade Joey to enter; she is reluctant until she learns the winner receives a $5,000 prize for college tuition. Even more shockingly, Pacey enters, and in the process exposes some hypocrisy.
In the season finale, Dawson and Joey are forced to confront their true feelings. Joey visits her father Mike (Gareth Williams) in prison and debates leaving to go to France. Jen's grandfather dies and she turns to Dawson for comfort; however, the season ends with Dawson and Joey finally kissing.