No. 1 Squadron was established as a unit of the Australian Flying Corps (AFC) at Point Cook, Victoria, in January 1916 under the command of Lieutenant Colonel E.H. Reynolds. With a complement of 28 officers, 195 airmen, no aircraft and little training, it sailed for Egypt in mid-March 1916, arriving at Suez a month later. There it came under the control of the 5th Wing of the Royal Flying Corps (RFC).
After training in England and Egypt, the unit was declared operational at its new headquarters in Heliopolis on 12 June, when it took over aircraft belonging to No. 17 Squadron RFC. Its three flights were, however, operating in isolation at different bases in the Sinai Desert, and the squadron did not reunite until December. Flying primitive and poorly armed Royal Aircraft Factory B.E.2 two-seat biplanes, its primary roles during this period of the Sinai Campaign were reconnaissance—including aerial photography—and artillery spotting for the British Army. No. 1 Squadron pilots attached to No. 14 Squadron RFC took part in the Battle of Romani in July and August. In September and October, B and C Flights, led by Captains Oswald Watt and Richard Williams respectively, undertook bombing and reconnaissance missions in support of the Australian Light Horse in northern Sinai.
On 12 September 1916, the British began to refer to No. 1 Squadron as No. 67 (Australian) Squadron RFC. This practice continued until January 1918, when the unit officially became known as No. 1 Squadron AFC. The relationship between airmen and ground crew was less formal than in British units; squadron members recalled that "The CO is the only one who is ever called 'sir'" and that officers did not demand "saluting and standing to attention and all that rot". The unit received the first of several Martinsyde G.100 single-seat fighters to augment the B.E.2s on 16 October; although considered obsolete, the "Tinsyde" was substantially faster than the B.E.2, and armed with forward-firing machine guns. Shortly before the squadron took part in a bombing raid against Beersheba on 11 November, Lieutenant Lawrence Wackett managed to fix a machine gun to the top plane of one of the B.E.2s, using a mount he designed himself. Each flight was also assigned a Bristol Scout beginning in December, but it too was obsolete and under-powered, and the squadron ceased operating the type within three months. Other older models issued to the unit included the Airco DH.6, Martinsyde G.102 and Nieuport 17. On 17 December, the squadron's flights were finally brought together at one base, Mustabig.
March 1917 saw the heaviest bombing campaign carried out by the squadron to date; short of its regular 20-pound (9.1 kg) ordnance, the pilots improvised by dropping 6-inch (150 mm) howitzer shells on Turkish forces along the Gaza–Beersheba line. During one such mission on 20 March, Lieutenant Frank McNamara earned the Victoria Cross for landing his Martinsyde in the desert under enemy fire and rescuing a fellow pilot whose B.E.2 had been forced down. On 26 March, No. 1 Squadron took part in the First Battle of Gaza; it suffered its first combat death the next day, when one of its B.E.2s was attacked by a German Rumpler. The unit participated in the Second Battle of Gaza on 19 April; like its predecessor, the attack was a failure for the Allies. Williams, later known as the "Father of the RAAF", assumed command of the squadron in May. Two B.E.12s were delivered the same month; like the Martinsydes, they were armed with a forward-firing machine gun and employed as escorts for the B.E.2s. By June, mechanical issues caused by hot summer weather and the threat from new German Albatros scouts were rendering the B.E.2s largely ineffective, and Williams urgently requested newer models. Modern aircraft were eventually delivered, first the Royal Aircraft Factory R.E.8 in October, and then the Bristol F.2 Fighter in December. "Now for the first time," wrote Williams, "after 17 months in the field we had aircraft with which we could deal with our enemy in the air."
No. 1 Squadron joined the 40th (Army) Wing of the RFC's Palestine Brigade on 5 October 1917. On 22 and 24 November, the squadron bombed Bireh village during the Battle of Jerusalem.The first of its 29 confirmed aerial victories, over an Albatros, occurred on 3 January 1918. By month's end, its complement of aircraft included five B.E.2s, five Martinsydes, two R.E.8s, and nine Bristol Fighters. The squadron supported the Capture of Jericho in February 1918. It carried out air raids and reconnoitred prior to the First Transjordan attack on Amman in March and prior to the Second Transjordan attack on Shunet Nimrin and Es Salt a month later; it also flew reconnaissance missions during the advance to and fighting near Es Salt and Jisr ed Damieh. By the end of March, it was equipped with 18 Bristol Fighters, which had replaced all the other types. As well as undertaking offensive operations, the Bristol Fighters served in the photo-reconnaissance role. During the last week of April 1918, the squadron moved its base forward from Mejdel to a new aerodrome outside Ramleh. Williams relinquished command in June to take over 40th Wing.
Beginning in August 1918, members of No. 1 Squadron, including one of its aces, Lieutenant Ross Smith, were attached to Colonel T.E. Lawrence's Arab army to protect it against German bombing. In September, the squadron began operating a Handley Page O/400, the only Allied heavy bomber in the Middle East and the only twin-engined aircraft flown by the AFC. That month it joined the Bristol Fighters in the final offensive of the Palestinian Campaign, the Battle of Armageddon, inflicting what the Australian official history described as "wholesale destruction" on the Turkish Seventh Army. By October, the Bristol Fighters had moved forward from Ramleh to Haifa and by the middle of the month were required to patrol and reconnoitre an exceptionally wide area of country, sometimes between 500 and 600 miles (800 and 970 km), flying over Rayak, Homs, Beirut, Tripoli, Hama, Aleppo, Killis and Alexandretta. They bombed the German aerodromes at Rayak, where 32 German machines had been either abandoned or burnt, on 2 October. On 19 October, the first German aircraft was seen in the air since fighting over Deraa in mid-September, just prior to the Battle of Sharon. Smith and another pilot forced a DFW two-seater to land, and destroyed it on the ground by firing a Very light into the aircraft after the German pilot and observer had moved to safety. In the wake of the 31 October armistice with Turkey, the squadron relocated to Ramleh in December, and then in February 1919 to Kantara. There its members were personally farewelled by General Sir Edmund Allenby, who congratulated them for achieving "absolute supremacy of the air ... a factor of paramount importance" to the Allied campaign.
No. 1 Squadron returned to Australia on 5 March 1919, and was disbanded.