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They attacked by bombing the restaurant on Prokofy Neva's Coney Island boardwalk while he was hosting an outdoor party, blurring the view with smoke and fire and abruptly ending the salsa dancing and hot-dog lunch. In the plane's cockpit was a crude caricature of a Muslim terrorist.

While Prokofy was distracted, someone walked up and catapulted him into the air. Drifting for a moment, high above the boardwalk, he could see that the intruders had dumped a large model of one of the fallen World Trade Center towers in the middle of his land. Demolishing it would make a mess and frustrate his paying tenants, who were already yelling with outrage.

The vandals were having their fun with Prokofy Neva, a well-known landlord in Second Life – and at the computer keyboard in her New York apartment, his real-world alter ego, a Russian translator named Catherine Fitzpatrick, was helpless to stop them.

Even virtual life gets messy. These kinds of incidents, known as “griefings,” have become infamous on Second Life, a vast, online social community set in an imaginary environment. Members use virtual characters called avatars, who may gamble, shop, fly, pray, do drugs or have lots of virtual sex on property designed and built by their human masters.

Second Life is part of a growing Internet galaxy of virtual worlds, which allow large numbers of players to interact simultaneously with each other in a three-dimensional, video-game-like setting. Many are actual games with missions and goals laid out for participants, from piloting spaceships in Eve Online to battling monsters as a motley band of fantasy characters in World of Warcraft, whose paying citizenry now tops 8.5 million.

But the newest batch are essentially graphic-based chat rooms, social hangouts navigated by using the keyboard to move around a humanoid image. There are sites for kids, such as Disney's Club Penguin, a cartoon land of igloos, as well as sites absolutely for adults, like Red Light Centre, which was created by a Vancouver entrepreneur and is modelled after Amsterdam's red-light district.

It may sound frivolous, but many technology watchers believe that virtual worlds may shape the next evolution of the Internet. This spring, Gartner Inc., a leading research company in Britain, predicted that 80 per cent of Internet users would have virtual identities by 2011. IBM is said to be quietly developing a program that will allow avatars to wander the Web freely. New software may also allow them to be controlled with gestures rather than keyboard and mouse, the same way games are played on the Nintendo Wii.

Before long, we may all be teleporting digital reflections of ourselves around the world – hosting business meetings, test-driving virtual cars, touring simulated versions of real-life real estate, attending class or slaying trolls – as instinctively as we now click on a website. Your avatar would be your online ambassador.

Already, the prospect of reaching millions of users has enticed corporations – car companies, clothing stores, even banks – to take up residence in virtual worlds. Musicians with new albums, such as New York singer-songwriter Suzanne Vega, have held Second Life “concerts,” in which their avatars perform. Companies have held press conferences in virtual worlds, conducted job searches in which they interview people's avatars for real-life positions and set up game-based stores to flog virtual copies of their regular wares.

Even governments have got involved, with Sweden opening the first official Second Life “embassy” early this year and Estonia recently announcing that it would be the second.

But the future is a controversial place. Virtual worlds have raised a new round of ethical questions about the rights and responsibilities of online life, both between the people dwelling in these places and the companies that control the servers upon which they run.

The debate is not just academic or speculative. Since some of these sites allow players to buy and sell virtual “property” – and then cash in their profits for real-life legal tender – fraud and vandalism are costing people time and money. The question is how to stop troublemakers without squelching the spirits of these developing virtual places.

Limits of liberty

The attack on the “Coney Island” restaurant came after Catherine Fitzpatrick complained loudly on an online message board about a crude parody in which someone on Second Life simulated 9/11, complete with virtual airplanes crashing into a model of the Twin Towers and bodies falling from the top floors. Some people thought the perpetrators should have been promptly banned from Second Life, although Ms. Fitzpatrick says she ultimately sides with free speech.

However, she is still seething about the Coney Island incident, even two years later. “When they crash and bomb things and push your avatar around, it's like a denial of service attack,” she says. “You can't use your land, your event is disrupted. People scatter.”

Ms. Fitzpatrick has tenants, other players who are paying rents of $20 or higher for space in the virtual storefronts and apartments she has built, and some have moved out because of the attacks. She is reluctant to give details about the real-life costs, for fear of attracting more trouble.

But real-world consequences are increasingly treading onto virtual lifestyles. In South Korea, the population is so fanatical about online gaming that virtual theft has been added to the country's criminal code. Judges there routinely handle charges against hackers who pilfer “magic” items in the games and steal access to sought-after characters, and then sell them on a black market estimated in the millions of dollars.

The crossover between virtual and real worlds can get ugly: This year, an avid Ukrainian player of the virtual role-playing game Lineage II was charged with murder after stomping a fellow gamer to death when an online dispute spilled offline, according to the Moscow Times.

German police are reportedly investigating two adult Second Life residents who participated in a sexual age-play fantasy, where one of them pretended to be a child, while also providing links within the site to pornography involving real children. Experts have suggested that the sites also could become venues for money laundering and terrorist activities. As politicians move online, fundraising in virtual environments could cause them to run afoul of campaign-finance rules.

Even in mundane matters, there seems to be a lot of bickering about the rules, for a free-spirited cyber-paradise. This is a community of more than 20 million people among whom the ways to divvy up a dragon's treasure are regularly the subject of detailed lawyer-talk. Real-world panic ensues when someone dumps a digital building on your virtual-world land.

World of Warcraft diehards rail against the “gold farmers,” basically sweatshops full of workers in Asia paid low wages to play WoW and earn gold to be sold to Western players who don't have the time or patience to work their own way up the game's levels.

Players also squabble over property boundaries, get blacklisted for bad behaviour and passionately debate the design of a virtual constitution.

An outsider might be forgiven for thinking virtual-world enthusiasts were a bit loony. After all, why bother with a “second life” only to rerun the same debates from the first one?

The reason is that there really is no second life, argues University of Toronto philosophy professor Peter Ludlow. The more time we spend online, the more any dividing line blurs. Dr. Ludlow has chronicled his days as a contributing editor to a virtual-world newspaper in a new book, The Second Life Herald: the Virtual Tabloid that Witnessed the Dawn of the Metaverse (co-written with Mark Wallace), which comes out this fall.

“People have to be vigilant,” he says. “We're moving into a world where the structure is designed by engineers, not people like Thomas Jefferson.”

In a digital age, computer companies can be as large a threat as government to personal freedom. “When John Stuart Mill wrote On Liberty, he said that threats to liberty can come from lots of things – from the king, but also structural institutions. And that's the sort of thing we need to be on the lookout for, as our lives move online: Who is protecting our liberties there?”

For starters, not as many prepubescent boys as you might think. Studies have put the average age of virtual-world residents in their mid-to-late 20s, many of them married with kids. In World of Warcraft, one in 10 female players are reportedly homemakers. In a Second Life survey conducted by a Dutch technology think tank, half of the respondents who spent more than 30 hours a week on the site declared incomes of more than $50,000 (U.S.).

This is the group – lawyers, professors and creative technology workers – shepherding the debates about virtual law and ethics. They usually begin from the tenet that residents and players should be free to do as they please – until their freedom begins to encroach on someone else's or until their virtual lives have real-world consequences.

In the physical world, those lines are often drawn around public and private property, national borders and thoughts versus deeds. But how do you define property in a public but non-geographical space, created and owned by a private corporation and operated by a paying user? In Second Life, that's a casino.

Can you sexually harass a digital image on the computer? And if your pranks – permitted by a loophole in the software – crash the server and cost a virtual mall a day of shoppers, have you committed a crime?

To bring it down to the basics of death and taxes, when can a computer company exile your avatar from your own virtual property? And how do you pay the Canada Revenue Agency for the net gain after bartering a virtual saxophone for, say, a virtual sofa?

The lawsuits are just getting started: Last month, in the first legal battle between two digital characters, an American resident of Second Life filed a civil suit against another virtual resident for selling pirated copies of his SexGen software, which animates avatars into erotic poses.

“The purpose of this suit is not only to protect our income and our product,” Kevin Alderman told The Associated Press, “but also to show, yes, you can be prosecuted and brought to justice.”

Suddenly, clarifying the rights of your avatar doesn't seem quite so loony.

Liberation armies

Second Life is a land of “islands” constructed almost entirely by the residents themselves, who also create their own virtual items – and appendages – at will. Running off 15,000 computer servers at Linden Labs in San Francisco, the site has its own stock exchange and its virtual currency can be traded for cash in the real world, which means tech-savvy types can make money selling fake stuff, such as apartments and furniture, to fake people. (It also means that when Prokofy Neva loses tenants, Catherine Fitzgerald's bank account takes the hit.)

In the beginning, much of the original property was left open to editing, with the idea that users would help the graphics become more sophisticated quickly. But that also left the place vulnerable. Since Second Life went online in 2003, griefers have set off atomic bombs in public spaces, dumped graffiti across business sites and created innocuous objects such as beach balls and party hats that self-replicate until they clog the space and overwhelm the servers.

Last year, Second Life claimed its first living, breathing millionaire, Anshe Chung, who had made $1-million (U.S.) entirely by developing virtual real-estate and other investments, over the course of two years, from an initial outlay of $10. Her in-game press conference was interrupted by a swarm of flying penises.

The Internet can be a wild frontier. “Going to Second Life is now the equivalent of running a field-marketing program in Iraq,” Erick Hauser, the creative director of Swivel Media, warned businesses in a recent article in Forbes magazine.

For example, in an act of anti-corporate protest last year, the “Second Life Liberation Army” fired virtual guns at shoppers outside a virtual American Apparel store. The clothing company recently announced it was closing its virtual doors.

Virtual worlds are spaces where declared neo-Nazis can brazenly take up public residence and pink pigs can be programmed as grenades. Flashy political protests are to be expected. Early this year, after weeks of placard-waving from neighbouring properties, a virtual riot – complete with the aforementioned pigs – broke out at the Second Life headquarters of the Front National, the far-right French political party headed by Jean-Marie Le Pen.

Blog reaction was mixed, although a good portion supported the rioters, if not their tactics.

Personal sabotage tends to be a different matter. The griefings against Ms. Fitzpatrick have continued. She has got used to the giant refrigerator someone planted on her Second Life property, blocking much of the view. She is less sanguine about the time hackers designed a simulated rain of obscene photographs that filled the computer screen.

“Picture your own [virtual property] with 20 tenants and they are all screaming in horror,” Ms. Fitzpatrick explains. “They've got this awful thing in their view and they can't turn it off.”

In trying to remove the pornography, she says, it is easy to delete valuable buildings and items by mistake – designs that may have cost the owner hundreds of real dollars. Like other landlords, she has maximized the security options on her properties – now her tenants can't even change their wall paper. Many islands have restricted who can visit, like the gated communities of the real world. Ms. Winters could hire one of the private armies that roam Second Life for protection, but they are, she says, as bad as the griefers.

“I hate that word,” objects Patrick Sapinski, a 20-year-old Toronto-area resident, who, as Plastic Duck, was for a time one of the most infamous griefers in Second Life. “If you look it up in the dictionary, it means to cause someone emotional pain. That was never my goal, to go around and piss people off, and cause any kind of damage. We did some performance art, some really stupid stuff. And people take offence to that.”

Mr. Sapinski is evasive about the incidents he participated in – he denies, for instance, any direct role in the Twin Towers creation. As he sees it, his reputation has been malignly exaggerated in the buzz of chat rooms and blogs that describe him as “sinister” or a “jihadist.” He says most of his stunts were harmless – a group of associates might attend a Second Life event as mimes holding blank signs. “People would think something was going down, some kind of attack or something, and they'd report us and it would go on our record.”

Mr. Sapinski suggests instead that he was helping Second Life by finding glitches in the code – loopholes that let one avatar sit on another avatar's head, or create oversized objects, or endlessly generate Linden dollars: At one point, he says, he had three billion Linden dollars in his account, a fact he reported “almost immediately.”

He concedes that the concept of Second Life, as a free-spirited place where everyone was essentially anonymous, “didn't exactly give me a reason to be on my best behaviour.” Linden Labs apparently agreed: After five months, Plastic Duck was officially banned from the site. But Mr. Sapinski admits that he has slipped back in with a new name and face.

‘Ninja looting'

Meanwhile, attempts to free virtual worlds of real-life complications continue. A courthouse is under construction in Second Life in order to mediate disputes between players formally – copyright issues, for instance, over in-world property. Linden Lab tries to keep up with complaints, reporting suspensions and issuing warnings in an online “police blotter.”

In World of Warcraft, the identity of unethical competitors quickly spreads through forums and chat rooms. “Ninja looting” – stealing items when it is not your turn – or killing weaker players for sport quickly ruins your reputation, and people won't play the game with you.

One crucial issue in a cyberspace that touts autonomy is the balance of powers between the people playing and the designers running the server – to say nothing of big business looking for its share of the pie. The “Greek God model” of government, as Dr. Ludlow argues, is incompatible with the ideal of virtual worlds as places of autonomy and free speech.

Companies controlling virtual worlds have to navigate a thin line between maintaining an overarching list of community standards while not policing everyone overzealously. Just about every step they take generates controversy. When Blizzard Entertainment, the company that created World of Warcraft, ordered a player to stop recruiting an openly gay, lesbian and transgendered guild of players – saying it feared they would be harassed – they got virtual protest parades and bad press.

To counter the negative publicity over the German child-porn case, Linden Labs recently introduced a new age-verification system for Second Life residents that requires them to submit a driver's-licence number before they can access “mature” locations. The predictable response: A heated debate over users' privacy rights.

Even the right to control access to privately owned virtual worlds is subject to debate. Linden is currently being sued by a U.S. lawyer named Marc Bragg who argues that his eviction from Second Life for alleged misconduct unlawfully denied him access to his valuable virtual property. A judge recently approved the case to go to trial.

It may seem inconsequential, says Joshua Fairfield, an associate professor of law at Indiana University, but if the economies of virtual worlds take off, then ownership will become an important legal issue.

“If I, say, go to the local store and buy something and take it home, and then I go back and break some rules in the store, can they kick me out of the store? Well, of course they can. Can they stop me from buying something there in the future? Of course they can. But can they come to my house and repossess the thing I have already bought and paid for?”

American law prohibits banks and credit companies from helping people pay their debts to offshore gambling websites, which also creates a murky area, Mr. Fairfield says: If you use a credit card to buy Linden dollars for a night of blackjack at the Second Life casino, has the bank broken the law?

This year, in an effort to clarify the laws, Linden Labs invited the U.S. Federal Bureau of Investigation to tour Second Life casinos. Then, at the end of July, it announced a complete ban on in-world gambling.

“The biggest risk is that we'll stifle the untapped potential of virtual worlds by regulating before we know what we're dealing with,” says Mr. Fairfield, an avid player of World of Warcraft, who falls into that non-stereotypical demographic – he's 33 years old and married with three daughters.

This spring, he attended a conference of game-industry professionals and scholars who had agreed, in sessions of real-life podium pounding, to a 10-point policy platform for virtual worlds. Among their recommendations were that game developers should not be held responsible for the actions players take inside virtual worlds; that a players' bill of rights should be drafted; and that a self-governance group of virtual-world stakeholders should be created. The policy platform was to be sent to presidential candidates for the 2008 election.

And none too soon: Once a joint economic committee of the U.S. Congress starts exploring how to tax your utopia, it starts to look a lot less utopian.

The current crop of virtual cyberspaces are early models. They may or may not survive into the next generation. The business question is still unresolved. Navigating the sites can be slow and cumbersome. World of Warcraft, though wildly popular, is nonetheless limited to people who like to fight pretend dragons. And it's now become trendier to trash Second Life in tech circles than to hype it.

But a future system of distinct virtual worlds with increasingly lifelike avatars who can teleport between them might make today's websites obsolete, as well as solve at least some of the ethical questions, by cordoning off the questionable behaviour – like the city streets you know not to walk at night. With the content clearly described on its homepage, for instance, there is no chance that someone might wander into Red Light Centre expecting to find a book club.

(The founder of that site is about to launch a Vancouver version focused on music, with an amphitheatre that can hold 500,000 avatars for live concerts – “sex, drugs and now rock-and-roll,” a spokesperson said.)

In any event, virtual paradise sounds rather dull. What makes virtual worlds attractive is their zany potential and the surprising turns they might take. Who would have guessed, a decade ago, that teenage boys and housewives would be going on magical quests together, or that designing virtual furniture for virtual people could bring in a real-life income?

“We are in competition with the real world,” Phillip Rosedale, the founder and chief executive officer of Linden Labs, boasted to the London Sunday Times last December. “We are competing to create a better place for your mind to live.”

There are just a few bugs to work out.