In Los Angeles, Lt. Parker Barnes and John Donovan are tracking down a serial killer named SID 6.7 at a restaurant in virtual reality. SID (short for Sadistic, Intelligent, Dangerous - a VR amalgam of the most violent serial killers throughout history) causes Donovan to go into shock, killing him. The director overseeing the project, before Commissioner Elizabeth Deane and her associate, William Wallace, orders the programmer in charge of creating SID, Dr. Darrel Lindenmeyer, to shut down the project. Barnes is a former police officer imprisoned for killing political terrorist Matthew Grimes, who killed Parker's wife and daughter. Barnes killed Grimes and innocent bystanders. This caused him to become a convicted killer and serve 17 years to life.
Barnes meets with criminal psychologist Dr. Madison Carter following a fight that Barnes and another prisoner, Big Red, got into. Meanwhile, Lindenmeyer tells SID that he is about to be shut down because of the fail-safe being tampered with. At SID's suggestion, Lindenmeyer convinces another employee, Clyde Reilly that a virtual reality prostitute, Shelia 3.2, another project created by Lindenmeyer, can be brought to life. Lindenmeyer replaces the Shelia 3.2 module with the SID 6.7 module. SID 6.7, now processed into the real world, kills Reilly.
Once word of SID being in the real world gets out, Deane and Los Angeles Police Department Chief William Cochran offer Barnes a deal: if he catches SID and brings him back to virtual reality, he will be released. Barnes agrees, and with help from Carter, they discover that Matthew Grimes, the terrorist that killed Barnes's wife and daughter, is a part of SID 6.7's personality profile. After killing a group of security guards, SID heads over to the Media Zone, a local nightclub, where he takes hostages. Barnes and Carter go to the nightclub to stop him, but SID escapes.
The next day, SID begins a killing spree at the Los Angeles Olympic Auditorium. Barnes arrives at the Stadium to capture SID, and finds him on a train, where another hostage is being held by SID. However, Barnes seemingly kills the hostage in front of a bunch of horrified witnesses. Carter having caught up with Barnes after the incident, tries to prove Barnes's innocence, but Barnes is sent back to prison. Barnes is freed from his prisoner transport by SID, who once again escapes. Wallace and Deane are about to have Barnes terminated via a fail-safe transmitter implanted in him but Cochran destroys the transmitter after being told by Carter that Barnes didn't kill the hostage on the train.
However, SID kidnaps Carter's daughter Karin and takes over a television studio. Lindenmeyer, having come out of hiding, sees what SID is doing and is impressed, but later held hostage by Carter. Barnes ultimately destroys SID, but is unable to learn where he hid Karin. They place SID back in VR to trick the location out of him. When SID discovers that he is back in virtual reality he goes into a rage. Cochran lets Carter out of VR, but Lindenmeyer kills Cochran before he can release Barnes. Barnes starts to go into the same shock that Donovan suffered, but Carter kills Lindenmeyer, and saves Barnes.
Barnes and Carter return to the building that SID took over in the real world, and save Karin from a booby trap set up by SID. After Karin is saved, Barnes destroys the SID 6.7 module.

Question: Who is the terrorist that killed Barnes wife and daughter?
Answer: Matthew Grimes