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Hodgeson explains KIDS to Lain in the similarly-titled episode.

A project that lures children with the online game called PHANTOMa in order to harness their innate psychic ability to produce phenomena. Closely linked with the research of Professor Hodgeson.

It is the title and focus of Layer 06, when the collective power of the children successfully summons a giant image of Lain into the sky, and the Professor discusses his experimental findings with Lain (as a metaphor of Lain researching the KIDS effect online).

The project is likely used as an example to illustrate the power of the Wired and of consciousness over the real world.