(FORTUNE Magazine) – MEET WEBKINZ, the hottest property at your nearest playground. It's a cult toy in the grand tradition of the Cabbage Patch Kids and My Little Pony—only this version is tailored to a generation growing up in wired households, with Mom on Flickr and Dad on YouTube. So naturally, it comes with its own social-networking site. Call it Web 2.0 for the juice-box set.

The unassuming plush toy is actually an entirely new species: a cross between collector-bait Beanie Babies and Tamagotchi digital pets, with a twist of online virtual world Second Life to boot. Each stuffed animal (there are dozens, from frogs to unicorns) comes with an access code to Webkinz.com, a site whose virtual world lets kids interact with their pets' avatar, shop for them at virtual stores with KinzCash, and play games with other site users. There's even a KinzChat function for kids to talk with friends, though only through some 900 preset phrases. That's to prevent users—generally age 6 and up—from sharing personal information.

The site's figures are impressive. In November, 1.1 million visitors stayed an average of 154 minutes, according to Nielsen/NetRatings. (The audience grew to 2.3 million after Christmas.) That compares favorably with Web 2.0 stalwarts Facebook, whose 11.6 million visitors stayed for 72 minutes in November, and MySpace, which saw 54 million visitors average 124 minutes that month. "Any media company would kill for the kind of engagement numbers Webkinz sees," says Ken Cassar, chief analyst at Nielsen/NetRatings.

But unlike Facebook or MySpace, Webkinz is selling a product—and bridging the real and virtual worlds has paid off big for the family-owned company, Ganz. The 57-year-old Canadian firm, which also sells gift items like candles and wind chimes, launched Webkinz in 2005. The line has grown to 41 toys that retail at around $10, as well as 25 Lil'Kinz priced at $7.50. Ganz won't share sales figures, but NPD group says Webkinz was one of last year's top-ten plush toys by revenue. It's also an industry darling. Last month, the Toy Industry Association named Webkinz the year's best toy sold through specialty retailers.

As for the site, Webkinz.com is currently just a way to sell more pets. Free for 12 months to any Webkinz owner, it carries no advertising—although the benefits of buying more 'Kinz are promoted throughout. With each purchase kids extend their site access, add KinzCash to their virtual bank, and raise their pet's "happiness level" by introducing a buddy. It's little wonder that most Webkinz owners have more than one pet.

Meanwhile, another site for tots is trying to monetize a purely virtual experience. At ClubPenguin.com, kids can adopt an animated penguin free, but extra privileges—like decorating its igloo—cost $5.95 a month via Mom or Dad's credit card.

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