Who wants to be a virtual millionaire?

Lonely? Ugly? Broke? Don't worry, you can make friends, have a makeover and earn a million from the comfort of your armchair. There is a catch - your friends and looks will only exist online. But, for an increasing number of virtual adventurers, the money made within the games they play is cold, hard cash.

According to a report published by analysts Screen Digest this week, the market for massive multiplayer online games (MMOG) is now worth more than $1bn in the West alone. The report's author, Piers Harding-Rolls, says that, "there are millions of people playing MMOGs. These new games have brought with them many new gamers - and new ways of making money".

Virtual reality, once something dreamt of only by sci-fi writers and technology-obsessed visionaries, is now one of the fastest growing markets in the world.

There are a number of different kinds of MMOG. There are networking games (such as Habbo Hotel), shared 3D worlds (Second Life) and games where players can look after a virtual pet or become a respected dragon-slayer (World of Warcraft).

Second Life is probably the most famous virtual world, thanks to its similarity to reality and the increasing number of high-profile people and companies from the real world who have got involved.

If you've missed the Second Life phenomenon, it's a world created by computer programmers at a company called Linden Lab, based in San Francisco. Since 2003, would-be residents have been able to sign up to the site, create an online version of themselves (called an avatar) and can explore a world that is similar to our own - except that players can go anywhere, do almost anything and look however they like.

Second Life also has a thriving in-game economy, based on Linden Dollars. L$500 is roughly equivalent to £1 and the virtual money can be used to buy clothes, property and accessories. There are around four million registered users of Second Life, although according to Linden Lab, only 144,108 of these residents actually use the in-game money.

"The big revenue generators are still the traditional subscription games that appeal to the hardcore gamer," says Harding-Rolls. This is when players pay a fee to join a game or site and continue to pay to play.

Compared to the utopia of Second Life, World of Warcraft is a very different place - and a much more profitable one. WoW is a PC title that can be played as a straightforward video game or within an online network. Made by the US company Blizzard Entertainment - one of the most successful game studios in the world - it has three million subscribers in Europe and North America and has more than 50 per cent of the Western market in MMOGs.

"WoW has done phenomenally well because the actual game is easy to play on your own for several hours without having to get involved with a group dynamic," says Harding-Rolls. "Although MMOGs are all about a community and playing with loads of other people, it's easier for people to get into a game initially without having to interact with other players."

Habbo Hotel is a virtual hotel where visitors can hang out with friends online or even listen to some of the world's biggest bands. This functioning world has staged gigs by U2 and Gorillaz and record company Innocent has even launched a virtual band, 365, to exist only in the Habbo World. The site, which launched seven years ago in Finland and is now available in 29 countries, is popular with teenagers - so popular that it has 66 million users worldwide. While it's free to sign up, Habbo Hotel makes money through selling credits as well as letting companies advertise on the site.

There's even a virtual world for children. In Club Penguin, all the avatars are penguins and while children can chat with each other via their Antarctic avatars, they can also explore the snowy world and play simple games. Like Habbo Hotel, it's free to sign up but the best features are subscription only - costing $5.95 (£3.05) a month. Moderators check conversations for inappropriate language or behaviour to provide a safe online haven.

So how can it be possible to make money from this virtual gold rush? Aside from setting up your own MMOG, by spotting a gap in the market and exploiting it. There is a 3D-modelling tool in Second Life that allows any resident with the right skills to build virtual buildings, landscape, vehicles, furniture, and machines to use, trade, or sell. While virtual land can be bought for less than a dollar, real estate is how the first Second Life millionaire made her money. Ailin Graef, a teacher from Frankfurt who is in her thirties, joined the site (using the avatar Anshe Chung) three years ago. Since then, she has made L$300,000,000 by trading land and property that she has created using 3D computer modelling skills.

"My initial investment in Second Life was less than L$10," she says. "I realised people who were looking for land didn't have the programming skills to develop it." Ms Graef is the most successful member of a new cottage industry - "virtual loot farmers", who play the games just to obtain fantasy goods that they can sell in the real world. The best loot farmers can make real money although playing to earn is a time-consuming business.

Gareth Lancaster is the man behind avatar Moopf Murray, a successful in-game entrepreneur whose Skoopf roller skates ($60) have become a Second Life best-seller - 60,000 pairs were sold over two years. Mr Lancaster makes an income of between $20,000 and $30,000 (£15,000) a year thanks to his virtual business savvy.

One US writer has even chronicled his attempts to make it rich in the virtual world. Julian Dibbell, the author of Play Money: Or, How I Quit My Day Job and Made Millions Trading Virtual Loot, has turned his in-game quest for cash into a real-life book.

An increasing number of web-savvy corporations are launching virtual versions of their products online for promotional purposes, because it's an incredibly cheap way of targeting a notoriously tricky demographic.

The main users of traditional MMOGs are between 18 and 35, and for a few hours spent programming, companies can pitch their products to a captive audience. Adidas, Toyota and Dell have all created content for Second Lifers and Calvin Klein has just announced plans to launch the first virtual fragrance online. Second Life residents will be able to spray virtual partners with "fizzing fragrance bubbles" to initiate dialogue. No real money will change hands, but UK Lifers who want a sniff of the real thing will be able to click through to the CK IN2U website to request a free sample.

Earlier this month Sony announced its own virtual world, Home, which will be available through its new console the PlayStation3, later this year. While in the past, Sony has been dedicated to making boxed video games rather than web content, it's clear that the company wants a piece of the virtual gold rush. As with Second Life, gamers will be able to create their own avatars, buy clothes, create homes and network online.

"It's about emerging entertainment, powered by the audience at the centre of the experience," says Sony's Phil Harrison. "It's not just about Sony brands and games - it's a much wider network of connected spaces. The [games] industry is on the threshold of a new era of creativity, collaboration, communication and commerce."

It's not just big businesses that is getting creative online. Hillary Clinton and Republican George Miller have both held press conferences in Second Life, while the French presidential candidates Ségolène Royale has an avatar and the right-winger Jean-Marie Le Pen has opened an HQ there. Earlier this year, the Swedish Institute set up an embassy in Second Life.

With politicians appearing online, it was only a matter of time before the media followed suit. Reuters was the first news agency to open a bureau in Second Life and a full-time "in world" correspondent Adam Pasick - known in the game as Adam Reuters - mans it.

According to Pasick, reporting from Second Life works in two ways. "We bring in real-life Reuters news for those who want it, and I write stories specifically for Second Life residents."

Despite the buzz about MMOGs it's important to remember that there's a dark side to these brave new worlds. "It is a little bit like the Wild West out there at the moment. There are hardly any regulations or rules surrounding what you create and how you sell it," says Harding-Rolls. "There are dangers with trademarks, copyright and classification of content - it's all murky ground.

"It's an experiment at the moment - I imagine in the future that user-generated content will be applied in a more rigid way so it can be policed more easily."

As well as the possibility of being penalised for copyright infringement, "gold-farming" is another issue facing virtual worlds. Gold-farming (in contrast to the small-scale enterprise of "loot-farming") refers to the organised practice of using a whole factory of gamers to play through games to acquire in-game goods.

In WoW and similar titles, this might mean playing to get hold of magic potions or weapons; in other titles it could mean playing to accrue status or money. These virtual items are then sold on - for real money - to cash-rich, time-poor players who wish to advance in the games without spending their days in front of their computer screen.

In his book, Julian Dibbell describes a visit to an office in Tijuana where unskilled workers make $19 a day to play online, "harvesting the resources of imaginary worlds."

And some of the problems that are affecting players mirror what's happening in the real world. Skyrocketing property prices have recently become a problem in Second Life. In December last year, prices leapt by 24 per cent.

Where do these virtual worlds go from here? Screen Digest says subscription revenues from MMOGs will rise to $1.5bn (£0.75bn) by 2011. But Harding-Rolls isn't convinced that this will mean a huge increase in the number virtual/real millionaires.

"Second Life is quite unique but it's not actually particularly commercially successful," he says. And while there are people who are making money online, it's unlikely that the majority of gamers will turn a profit from virtual endeavours.

Then again, with the market set to grow by a third in the next four years, there's everything to play for.