In an alternate 1996, Los Angeles has descended into anarchy, with criminals ruling over sections of the city as warlords. The most dangerous of these warlords is Simon Phoenix (Wesley Snipes), who has recently kidnapped 30 people after their city bus violated his territory. As the L.A.P.D. lay siege to Phoenix's hideout, Sgt. John Spartan (Sylvester Stallone) aka "The Demolition Man", who has been chasing Phoenix for two years, rappels in from a helicopter, against orders. After defeating Phoenix's gang, Spartan holds Phoenix at gunpoint and demands to know the location of the hostages. Phoenix simply says the hostages are "gone" and begins setting off explosives throughout the building. Spartan subdues Phoenix and escapes the building with him, just as a final series of explosions causes it to collapse. Outside, Spartan is berated by his superiors for going in against orders, destroying another building (the origin of his nickname) and placing the hostages at risk. Spartan insists he took a heat signature scan of the building before he went in and only found enough people to be Phoenix's gang members. However, the fire chief approaches them and says he has found 30 bodies in the wreckage; Phoenix, as he is being led away, also says Spartan knew they were there but didn't care. Spartan is arrested for involuntary manslaughter.
After their respective trials, Phoenix and Spartan are incarcerated in a "cryoprison", which keeps its prisoners cryonically frozen in suspended animation. During a parole hearing in 2032, Phoenix escapes and soon thereafter embarks on a reign of terror throughout the city of San Angeles (the cities of San Diego, Los Angeles and Santa Barbara having merged after the big earthquake of 2012). As the city has long since become a utopia, police officers no longer know how to deal with violent criminals. Spartan, who had been sentenced to 36 years, is therefore paroled early from the cryoprison for the purpose of apprehending Phoenix.
As he searches for Phoenix, Spartan discovers that the mayor/governor of San Angeles, Dr. Raymond Cocteau, engineered the escape of Simon Phoenix in order to have him kill Edgar Friendly, leader of an underground resistance movement at odds with Cocteau's facist-like system of government. To this end, Phoenix was given extensive training while in cryostasis, including computer hacking and paramilitary skills. Friendly's resistance movement, dubbed "The Scraps", is made up of homeless people and refugees living on the margin of society in the underground ruins of the old city, periodically raiding the surface for food.
After seeing the exchange on security cameras, Spartan and Huxley check prison records and determine that Cocteau programmed Phoenix to make him an even more dangerous criminal and assassin, with the goal of eliminating Friendly. While Spartan and Huxley enter the underground to warn Friendly, Phoenix confronts Cocteau and demands that he release other prisoners to assist him. Phoenix and his gang attempt to kill both Spartan and Friendly, but Friendly has retained his combat skills, and the two of them and Huxley drive them off.
After being attacked in their underground base, Friendly and his Scraps decide to team with Huxley and Spartan against Phoenix and his new criminal gang.
Unfortunately for Cocteau, he did not anticipate that the SAPD would revive Spartan in order to try to stop Phoenix. He also underestimated Phoenix's criminal genius, much as Spartan had; Phoenix was conditioned in cryostasis not to kill Cocteau, but eventually he simply directs another revived criminal to do so. Before Lenina Huxley and John Spartan discover Dr. Cocteau dead they fight a couple of Simon Phoenix's thugs. Lenina Huxley knocks out one thug and shoots the other one killing him as it appears to be the first time she ever killed someone and it appears that Huxley and Spartan drive off 2 more henchmen to Phoenix. Phoenix then takes control of the cryoprison, planning to revive all the violent criminals in the facility to create an elite street gang and form a new base of power.
Spartan and his partner, and later sweetheart, Lenina Huxley (Bullock), attempt to stop Phoenix from rebuilding his criminal empire in a San Angeles ill-equipped to resist it. Spartan tracks down Phoenix in the Cryoprison and, after an epic final confrontation, finally kills him by freezing and then decapitating him, destroying the Cryoprison in the process and assume 2 of the cryo-cons already sprung by Simon Phoenix are assumed eliminated by the cryo-prison blown up (one shoots Cocteau to death while the other threw his chair out of the way). With Cocteau dead, the city is in disarray as their planned city is unprepared for a more chaotic future. Spartan advises that the police chief and the surface dwellers get "a little dirtier" while Friendly and the Scraps get "a lot cleaner", and promises "somewhere in the middle... you'll figure it out."