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We are seeing too much abuse with external Instant Messenger programs, so we are blocking those.

However, we do use IM as an internal tool, so I would like to install a LAN IM service. Any suggestions on which one is good?

We would like to be able to log the chats as well.

I'm no expert, but I use Microsoft Office Communicator for internal communications although it may be a bit overkill for your needs.