In the car park of a large supermarket on the outskirts of Stockholm, Niklas Wolkert, a 31-year-old programmer, is waiting with his son for his wife to finish shopping. Niklas looks like any other bored father until he takes his mobile phone from his jacket pocket and begins tapping out a text message.

It might look innocent enough, but in a few moments, Wolkert will be stepping into a virtual world. Wolkert is about to begin a game of Botfighters - a game that uses positioning technology in the phone to turn Wolkert into a virtual assassin, fighting foes on the streets of Stockholm.

Botfighters is one of the most sophisticated games emerging on what is a new platform for play: the mobile phone. With their tiny screens and humble graphics it may seem hard to believe, but mobile gaming is seen as one way mobile companies can increase users' spending over the next few years. And you only have to look at Wolkert's face when he is playing Botfighters to see he is taking part in an extraordinary game.

"When you get a reaction from another player, the rush is ... tremendous," he explains, between firing missiles at unknown assailants. The aim of the game is to "kill" as many people as possible. Wolkert takes about 30 seconds to target his opponent, who is more than a mile away and closing in. The battle lasts about 20 minutes, with both players shooting missiles several times. The game is only stopped by the return of his wife and the shopping. But Wolkert vows this is not the end: he will track down his opponent again. Revenge killings are common in Botfighters, and some struggles can go on for weeks.

Each SMS costs Wolkert around 10p and each "turn" of the game generates new messages. One Botfighter recently ran up a bill of £600 in 60 days, but most spend a more modest average of £10 a month. The revenue adds up to nearly £35,000 a month, which is shared between the games's developer, It's Alive, and Telia, the biggest network operator in Sweden.

"I don't see it that the person at the other end is getting a text message," says Wolkert. "I see them getting a warning message from their robot that someone is shooting at them. I know that that person gets the same sort of rush that I get."

Sometimes, Wolkert engages in a spot of hit-and-run, cruising around the city shooting targets, driving off before they have a chance to retaliate. Elite teams, or clans, help each other get higher on the top list, although players rarely meet their assailants.

"What we've done is drape a virtual world on top of the real world," says Lars Erikson, of It's Alive, Botfighters' creator. "So when you are part of the game, you see things no one else sees. It depends a lot on the imagination of the user, but we try to feed them with information on our website so they can make up their own game."

To help them, the company has left a number of virtual items in the real world. Players constantly get messages telling them there is a "first aid kit" on the next street corner, or a bigger weapon on the other side of the street.

"For the players, their phone is not a phone. It becomes your weapon or your radar," says Erikson. Wolkert adds: "It's a game that plays with your mind. It uses the best images you can get - those of your own imagination. My opponent probably doesn't have the slightest similarity to my idea of what the game looks like to me, but that doesn't matter to me."

In Botfighters, the players rarely meet their opponents, but in September, It's Alive will release Supafly, a kind of online soap opera that will encourage people to meet each other. The company is also developing a version of Botfighters for the UK, this time tied in with the forthcoming Channel 4 series X-Fire.

Botfighters and the rest are at the vanguard of a mobile gaming revolution, using the latest technology to make themselves stand out. But even some old, familiar classic games are getting a new lease of life on handheld devices.

Pac-Man, for instance, burst on to the arcade scene in 1980 and quickly became the most popular coin-operated game of all time. It did so in a console as big as a wardrobe. What the mobile phone industry wants to know is: can it make millions again, this time on a screen the size of a matchbox?

The handheld version looks, plays and even sounds like the original - and is just as addictive. And Pac-Man is not alone. More classic arcade games are being converted to run on mobile phones, with a host of Atari favourites such as Pong, Centipede, Breakout and Asteroids soon to appear.

The latest range of mobile phones comes with Wireless Java, a system that allows programmers to write miniature versions of arcade classics for the new handsets. Wireless Java phones, in the form of the Nokia 7650, are only just in the shops, but they will be followed next month by the Motorola T720 and by Sony Ericsson's T300 before Christmas. Other manufacturers are not far behind.

Big things are predicted for these little games. Research company Datamonitor forecasts revenues of £5bn by 2006, from the 850m customers willing to pay for mobile games by the middle of this decade. That remains to be seen. But the wireless industry is desperate to recoup its £22.5bn investment in 3G networks, and sees games as one of its key new markets.

Today, to buy a game for your mobile phone, you must first access the internet via your handset and select the game you want to buy from specially designed Wap (wireless application protocol) sites. Next, you confirm your order by sending an SMS to the site. The game is then downloaded to your handset and the cost added to your phone bill. The games will cost between £1 and £3 and, in some cases, you might have to pay for each new level.

The miniature version of Pac-Man was built on a piece of software developed by Synergenix, a Stockholm-based company founded in 1999 by Anthony Hartley of Worthing. Hartley says he is well placed to exploit the new mobile game market. He started programming at the age of 11 on the Sinclair ZX80, and sold his first commercial game three years later. He came to Sweden in 1994 and set up as a developer for the Game Boy. For Hartley, mobile phones are the next step.

The Mophun game engine Synergenix has developed is open source, meaning that any small business wanting to design games for use is welcome to download it free from its website (see link below). Initially, at least, a few games will be given away with new handsets, but the majority will be for sale.

"It's already being used by many programmers simply working off their own back," explains Hartley. "Many are hobbyists who have just thought 'wow, I can program a mobile phone'."

These independent developers submit their game to Synergenix, which submits the game to the handset manufacturer. If all parties agree that the game is suitable, then it gets a kind of digital signature that protects the game from being tampered with. Synergenix says that most games will sell for about four euros. It will then take 50-euro cents for each game that uses its engine. The remainder will be split between the network operators (who will take at least half), the content aggregators (companies that distribute games to the networks) and the programmer. Hartley says a typical programmer can expect to make about one and half euros for each game sold.

And you don't have to have a new Java phone to play games on your mobile. A market for games exists for older handsets using SMS and Wap. Celador, creator of Who Wants to Be a Millionaire?, offers a text version - complete with lifelines and cash prizes - in collaboration with Vodafone and Motorola. Scotland's Digital Bridges produces a range of SMS games, including two linked to Star Trek and another to Scooby Doo. Riot-E in Helsinki provides SMS games for Lord of the Rings. Similar games exist in Iceland, Denmark and Russia.

Although the Scandinavian countries still have the edge on mobile technology, many industry analysts believe that the UK is ideally placed to take advantage of the new mobile game market.

The UK helped develop the first home market for computer games during the microcomputer boom of the early 80s. Since then, the production of games has become more complex and far more expensive for independent developers to compete. But mobile handsets have much the same processing power as the original microcomputers, such as the ZX Spectrum and Commodore 64, which is one of the reasons the first games to be sold on Java handsets will be arcade classics.

"The cost of developing a video game is so high and the market is shrinking," says Juan Montes, head of content at Motorola Europe. "The typical budget for a computer game is now £2-3m, and the development cycle is two years. For £20,000, you can do a really nice Java game and see your game being used in as little as six weeks.

"In the UK, a lot of experience comes from independent developers who have experience on the Amiga and Game Boy. Those are the kind of skills needed for the new Java games."

Still, the latest Java handsets are very expensive, and the new services running off them, such as Multimedia Messaging (MMS), are out of the price range of most children. Most analysts think it will be Christmas next year before colour handsets become cheap enough to be bought for children. Perhaps that is why the first games that are being sold for the Java phones are games from the early 80s. You have to be over 30 to be able to afford them.