Researchers from Rensselaer Polytechnic Institute have created an artificial intelligence to drive an avatar in Second Life. Currently their AI has the smarts of a typical four-year old child, but it is capable of listening to what is "said" (in text) in Second Life and reacting to it appropriately as well as moving the avatar and typing its own replies.
Whilst a four-year old might not sound like much to the uninitiated, Professor Bringsjord, leader of the project and head of the Cognitive Sciences Department points out that to fully mimic adult behaviour would take a super-computer. As well as learning about creating AIs, the team are able to test theories about the development of the human mind. There is a (rather large) video of Edd the AI demonstrating that he can't put himself in the mind of another person (something typical of 4 year olds), and chatting briefly to two "normal" avatars available.