The crew are on an ocean planet investigating a seeding vessel called the SSS Esperanto which was studying the life forms that had been introduced by humans. They find 3 bodies aboard, people who committed suicide, and a haddock who did the same. Lister notices an oil covering everything and Kryten suggests that it is a hallucinogenic venom much like the oil from an octopus or squid.
He does a chemical analysis and rushes the others back to Starbug saying that the oil contains a hallucinogen which induces despair, which is what drove the crew of the Esperanto to kill themselves. They try to escape in Starbug to avoid the same happening to them, but the despair squid chases them and they crash into a rock. Starbug is destroyed.
The gang wake up to find they were playing a computer game called Red Dwarf for the last four years (and they only scored 4%). In "reality", Lister is the rich and successful Sebastian Doyle, Rimmer -- his brother, Billy -- is a ne'er-do-well bum, the Cat is the most uncool, style-less geek you could imagine, named Dwayne Dibley (Teeth stick out a mile, terrible taste in clothes, etc.). Kryten is a half-human, half-machine cop named Jake Bullet.
While leaving the video game building and adjusting to all that has happened, Sebastian finds out that he is the chief of an organization called the Ministry of Alteration which organizes mass murders to "purify democracy".
Bullet kills a cop while defending a young girl and they make a run for it and are chased by the fascist police. Holly, meanwhile, is trying to tell them that they're hallucinating, but they can't hear her.
In their heads they manage to escape the police and flee down an alleyway. Bullet, utterly appalled by his actions, decides to kill himself. So do Billy and Dwayne. Sebastian, despising his mass murdering lifestyle, decides the same. Holly communicates to Kryten on a higher frequency and gets him to open a canister of Lithium Carbonate (a mood stablizer), which his hallucination has convinved him is a fire extinguisher.
The gas revives them just in time and they reflect on why they decided to kill themselves, before leaving behind the Esperanto to head back to Red Dwarf.