Lucid dreaming is consciously perceiving and recognizing that one is in a dream while one is sleeping, and having control over the "dreamscape", or the faux-reality dream world within a dream. Stephen LaBerge, a published author and expert on the subject, has defined it as simply realizing that one is dreaming while in a dream. Other authorities contend that in order for the state of a dreaming person to be lucid, that person must have control over his or her dreamscape (because simply having the mental idea "I am lucid" could be a creation of the subconscious itself and not a real "rational" thought). Lucid dreamers, called oneironauts, report being able to freely remember the circumstances of waking life, think cogently, and act deliberately upon reflection, all while experiencing a dreamscape that seems vividly real.
A person in a lucid dream with full control may morph the dreamscape into any virtual reality that person pleases, all with properties that feel identical to that of wakeful consciousness. Doing literally anything within a lucid dream is not outside one's ability. Less skilled oneironauts who have trouble controlling their surroundings, however, sometimes instead make themselves like actors in chosen plays. Lucid dreams are notable for their durability in memory, being exceptionally more memorable than typical, non-lucid dreams (though it's still possible to not remember them). Oneironauts regularly describe their dreams as exciting, colourful, and fantastic, and often compare their dreams to a spiritual experience. Oneironauts have even reported lucid dreams that take on a "hyper reality", that is, a reality that is more "real" than waking life. In these dreams all elements of the dreamscape are amplified.
Achieving and recognizing lucid dreams
The most important aspect in lucid dreaming is to recognize that one is dreaming. Anytime that a person recognizes a dream sign, or anything that is out of the ordinary, they should perform a reality test as stated below. Many people report having experienced a lucid dream during their lives, often in childhood. However, even with training, achieving lucid dreams on a regular basis is uncommon and can be difficult. Despite this difficulty, techniques have been developed to achieve a lucid dreaming state intentionally. A number of universities (notably Stanford) conduct continued research into these techniques and the effects of lucid dreaming, as do some independent agencies such as LaBerge's The Lucidity Institute. At present, there are no known cases where lucid dreaming has caused damage on either the psychological or physiological level. However, it would be very hard to determine whether some form of lucid dreaming might prevent one from receiving a benefit from normal dreaming. Jungian psychology seems to indicate that non-lucid (or partly lucid) dreaming is a way to achieve self-understanding. Dream recall, the ability to remember one's dreams, is very important to lucid dreamers because it is usually desired that the lucid dreamer be able to remember lucid dreams. Improvement of dream recall is usually the first step people take to learn to have lucid dreams. A common practice used to increase dream recall is to keep a dream journal, or a notebook of dreams. The dream journal should be kept right next to the bed so that dreams can be written down as soon as a person wakes up. This is important because waiting until later in the day to write dreams down will cause one to forget most of their content. After waking up, it is helpful to keep your eyes closed while trying to remember dreams.
A common method used by people to test whether or not they are dreaming is called reality testing. This method involves performing an action with results that are difficult to re-create in a dream. An example of a reality test is to read some text, look away, and read it again, or to look at your watch, and remember the time, look away and look back. Observers have found that, in a dream, the text or time will often have changed. In the real world, the text will not change and the time will not change by more than one minute. Another method involves identifying one's dream signs, clues that one is dreaming. These can range from anything such as a pink elephant on parade to the cat talking to you. Dream signs come in four categories: Action - You, another dream character, or thing does something unusual or impossible in waking life; Context - The place or situation in the dream is strange; Form - You, another character, or thing changes shape, or is oddly formed /transforms, this may include the presence of unusual clothing or hair; Awareness - A peculiar thought, a strong emotion, an unusual sensation, or altered perceptions. Though occurrences like this may seem out of place in waking life, they may seem perfectly normal to a dreaming mind and learning to pick up on these dream signs will help in recognizing that one is dreaming. Experienced lucid dreamers will often use more advanced techniques, such as those described below, to induce lucid dreams at will.
Mnemonic induction of lucid dreaming
Mnemonic Induction of Lucid Dreaming (MILD) is a common technique used by lucid dreamers to induce a lucid dream at will. This method involves setting an intention to recognize dream signs while falling asleep.
Waking induction of lucid dreaming
Waking Induction of Lucid Dreaming (WILD) is one of the most common induction techniques used by lucid dreamers. In this particular technique, a person goes directly from being awake into a lucid dream. The key to this technique is recognizing the hypnagogic stage. This stage is within the border of being awake and being asleep. If a person is successful in staying aware while this stage occurs, they will eventually enter the dream state while being fully aware that it is a dream. Proponents recommend three steps to induce lucid dreaming: relax, stay aware, and go into your dream.
Other phenomena associated with lucid dreaming
False awakenings: In a false awakening, one suddenly dreams of having awakened. If the person was lucid, he/she often believes that he/she is no longer dreaming, and may start exiting their room etc. Since the person is actually still dreaming, this is called a "false awakening". This is often a nemesis in the art of lucid dreaming because it usually causes people to give up their awareness of being in a dream, but it can also cause someone to become lucid if the person does a reality check whenever he/she awakens. Rapid eye movement (REM) and communication during sleep: during dreaming sleep the eyes move rapidly. Scientific research in the 1950's found that these eye movements correspond to the direction in which the dreamer is "looking" in his/her dreamscape; extraordinarily, this apparently enabled trained lucid dreamers to communicate the content of their dreams as they were happening to researchers by using eye movement signals. This research produced various results, such as that (contrary to popular belief) events in dreams take place in real time rather than going by in a flash.
Sleep paralysis: During REM sleep the body is paralyzed by a mechanism in the brain, because otherwise the movements which occur in the dream would actually cause the body to move. However, it is possible for this mechanism to be triggered before, during, or after normal sleep while the brain awakens. This can lead to a state where a person is lying in their bed and they feel like they are frozen. Hallucinations may occur in this state, especially auditory ones. People also generally report feeling a crushing sensation on their chest (possibly because they try to consciously control their breathing). People trying to lucid dream sometimes try to trigger this state, or accidentally trigger this state, while using a waking induction of lucid dreaming (WILD) technique to enter a lucid dream directly when falling asleep.
Transformations: Some people believe (after some practice) one could transform their dream-selves into real or fictional animals, and claim to have tried sensory experiences not normally achievable while awake, such as 360 degree stereo vision, sonar (bat) vision etc.
History of lucid dreaming research
The term "lucid dreaming" was coined by Dutch author and psychiatrist Frederik van Eeden in his 1913 book A Study of Dreams (originally published in the Proceedings of the Society for Psychical Research, Vol. 26, 1913)  (http://psychology.about.com/library/classics/bleeden_dm0.htm). This book was highly anecdotal and not embraced by the scientific community. The term itself is considered by some to be a misnomer because it means much more than just "clear or vivid" dreaming  (http://www.psywww.com/asc/obe/faq/obe15.html). A better term might have been "conscious dreaming".
The 1950's research - in which lucid dreamers apparently communicated the content of their dreams in real time using eye movements - prompted philosopher Norman Malcolm's 1959 text Dreaming, which argued against the possibility of checking the accuracy of dream reports in this way. The enthusiastic endorsement of lucid dreaming during the 1970s by New Age proponents such as Carlos Castaneda did little to enhance its scientific credibility. However, during the 1980s, further scientific evidence to confirm the existence of lucid dreaming was produced  (http://www.stanford.edu/~mgoldens/lab/psyphy_lucidity.html), and lucid dreamers were able to demonstrate to researchers that they were consciously aware of being in a dream state (usually again by using eye movement signals  (http://www.susanblackmore.co.uk/Articles/si91ld.html)). Additionally, techniques were developed which have been experimentally proven to enhance the likelihood of achieving this state 
One outstanding question on the neurophysiological nature of lucid dreaming concerns the electrical activity in the frontal cortex, which is generally suppressed during normal sleep. The behavior of the frontal cortex has not at present been crucially analyzed with respect to lucid dreaming. There is a substantial cottage industry based around the technique of lucid dreaming, with an array of induction devices (usually based around flickering light arrays) commercially available to allegedly allow induction of lucid dreams. Their proponents also sometimes claim that these devices help achieve a higher level of spiritual consciousness, and associate it with other New Age concepts such as astral travelling or dream sharing. Regardless of these claims' validity, lucid dreaming as a scientifically verified phenomenon is well-established. Some proponents of technique claim they can use symbolic methods to research, program, and modify their nervous system itself. Memory management, creative solution generation, accelerated healing, autoinduced priapism, and ecstatic envelopment of one's body are among the various claimed techniques. An early recorded lucid dreamer was the philosopher and physician Sir Thomas Browne (1605–1682). Browne was fascinated by the world of dreams and stated of his own ability to lucid dream in his Religio Medici ... yet in one dream I can compose a whole Comedy, behold the action, apprehend the jests and laugh my self awake at the conceits thereof; (R.M. Part 2:11) The movies Abre los ojos (Open Your Eyes), Vanilla Sky, and Waking Life are partly about lucid dreaming, while the Nightmare on Elm Street series directly involves lucid dreaming as a plot device by which the villain threatens the hero/s. The Matrix, while not about lucid dreaming, has the hero in the similar position of living in a simulated world (complete with its own distinctive "dream signs", such as a subtle overall green hue and the slightly inaccurate mechanics) and being able to control it. There are thought to be some insights into the workings of the brain that can be found by lucid dreaming. In particular, in surveying the experiences of lucid dreams, many have noticed that the brain, at least while in dreaming, has the feature whereby it is possible for a single individual thought, memory, definition, belief, etc. to be incorrect while the rest of the mind appears to be working normally. An example would be where the "lucid" dreamer was walking around the dream world, knowing he was dreaming, retaining his full sense of identity and waking memories, yet believing for some reason a locked door can only be opened with a fish, and not a key (almost all lucid dream reports contain this kind of phenomenon). This is contrary to normal experience of brain malfunctions, which are usually more general, such as wholesale memory loss, or broad emotional imbalance.