On a scorching July afternoon, as the temperature creeps toward 118 degrees in a quiet suburb east of Phoenix, Ric Hoogestraat sits at his computer with the blinds drawn, smoking a cigarette. While his wife, Sue, watches television in the living room, Mr. Hoogestraat chats online with what appears on the screen to be a tall, slim redhead.

He's never met the woman outside of the computer world of Second Life, a well-chronicled digital fantasyland with more than eight million registered "residents" who get jobs, attend concerts...