dream (basic features):
1 - security: all communications excluded from site wide searches and tag inclusions
2 - simple inbox.sent with save sent messages by default
3 - simple default space configurable by site admin (eg defaults to 50 messges OR by size)
4 - simple forward/external address alert ("notify me when i receive a new message" pings user's registered email via a cron administered by site admin, perhaps 4 times daily)
5 - possibly: 'block this user' (because that could be seriously needed in a busy community)
6 - possibly: ability to contact user from any post (e.g. a 'contact me' under user's name beside post versus clicking through to profile to initiate)
7 - configurable settings: public, loggedin, only 'friends' (other options?)
8 - works with theme (inherits css)
9 - displays unread/waiting count upon login (places automatically into top bar or side bar etc)
10 - ... and is updated for future elgg versions...
i'm willing to put up 100 bucks (us dollars) to somebody who can seriously put this into motion. all that i'd ask is that you know what you're doing and have (perhaps) the ability to create a simple plugin that won't require elgg users to hack all sorts of files to get it working beyond a simple admin rules set...
if you're interested, please post a reply with a way to reach you to discuss this further (if you have zero contact info in your profile)...
ALSO if you are equally interested in this, then perhaps post a note with how much you might be willing to pledge for such an initiative (5 bucks, whatever you think you're willing to give, just be honest and committed because i believe that if it gets to a large number than there might be a serious dev stepping up for this - IM is on the roadmap, nut not PM)
thanks in advance to anybody willing to consider this...for an overview of a very useful and simple and elegant private messaging plugin to consider, check out the one i mentioned above: http://bbpress.org/forums/topic/401 (perhaps we could financially incent that dude to port his plugin over to elgg??) - oh, and this one is very nice too (like bbpress' with some enhanced folder features for wordpress users: http://www.vituperation.com/?page_id=531
BTW - if you make a pledge below, i'll update the subject line up top to reflect additions...
Keywords: contacting members, inbox, private messaging

Comments
Lots of folks are interested in PM. I would contribute $$ also. Geeklog also has a really nice, clean PM system as an example. It's $20 and I bought it and am very pleased. Many others have bought it.
http://www.portalparts.com/paypal/product_detail.php?product=4
Long life to free software! \o/
It is in the site CSS for blockquote.
Daveinboston, as David said, click in the 'HTML' button and add the text between <blockquote>YOUR TEXT</blockquote>. It'll appear as:
I'll reply about free software later. I know what you mean.
I hadn't noticed the block quote feature also, but it's groovy.
The PM system for geeklog that I mention is just an example. It is a plugin created only for geeklog CMS integration. I placed the link to show an example of a very clean, light but nicely feature PM system for a CMS. I have not integrated this into anything other than Geeklog.
How I state some weeks ago I'm working on it too. I expect to launch it this week.
However, could be very interesting to found many implementations to get the best things of them.
I'm very thankfull for you contribution for my trip to the elgg headquarters ;)
Cheers
I think this is the plugin? messages - http://elgg.org/mod/plugins/plugin.php?id=18
We have installed it on http://nocoso.nord-west.eu and i am wondering if there is any chance to send messages to users not in friendlist, perhaps integrated on the profile site.
Sorry, but if i look at social networking software the facebook software becomes standard. They had implemented some very nice features.