During the development of Sonic CD, a virus spread around the computers at Sega Headquarters corrupting the data of numerous games developed by Sega. The virus additionally had an AI programmed into it so it could figure what to corrupt and how to corrupt it.

Eventually, it found a prototype of Sonic CD and went into it. While looking around trying to figure out what to corrupt, Kyle Robinson, a beta tester for Sega, grabbed the game disc, and put it in a beta testing Mega CD, without knowing about the virus. Now, he showed up really late and all the employees were at their homes at that point. As soon as Kyle loaded into Palmtree Panic, the virus found Sonic's character object and corrupted it.

However, after corrupting Sonic, the console had an error and flashed numerous textures on screen. Since Kyle grew up with epilepsy, it ended up giving him a seizure. With no one to help him, he was left to die. The next day, the Sega employees found Kyle's dead body, and hired detective Tom Blue to investigate what happened.

The game disc happened to be right next to Kyle's corpse, and Tom put it in a spare Mega CD and started playing, while all the employees left. The virus, now the sonic he corrupted, saw what was happening, and came into the game visually, and then the events of Sonic CD Lost Build (the upcoming game with system crash.win) happened.

tl;dr: Virus corrupted Sonic CD, gave Kyle a seizure, Tom investigates game.