I have been interested in some time in the potential of "virtual pet" websites for language development. Like pet therapy, the need to attend to another being (and develop feelings vocabulary as you monitor it), feed it and provide other comfort measures seems to be a great context to elicit language. The thing is, many of these sites are too ad-ridden, complicated, or costly. Moshi Monsters, based in the UK, seems to be an exception worth exploring. You can "adopt" and customize a monster, decorate its house, and take it around town. There are simple games on the site that might serve as a reward for challenging students, and the Monster also poses "puzzles" which, when solved, earn you points toward furniture in the Monster's home, etc. The puzzles are actually academic in nature and would probably be appropriate for 2nd-3rd or older grade levels (or you can do them yourself) There are paid features such as a disco you can go to hear (and make your Monster dance to) "Lady Goo Goo" and "Broccoli Spears," and also a social networking component with "friending" of other kids, but you can avoid these if you like. You can only adopt one Monster per email, so maybe prepare to set up some extra gmail accounts if you like what you see and want to use it with kids (and, given the social network element, a letter home would be a good idea). You can see a review of the site here, the site's parent page, and a video demo below.
Moshi Monsters would serve as a great intervention context for a younger group, tough-to-motivate student, or a pragmatics group working together to take care of their pet.