IM is a type of communications service that enables one to create a private chat room with another individual. Typically, the instant messaging system alerts the user to whenever somebody on their private list is online -- a capability known as "presence." They can then initiate a chat session with that particular individual. People can communicate with each other by typing with a PC, wireless device (cell phone, PDA, etc.) or other Internet appliance/device. Or, they can use a combination of these gadgets to communicate.

A chat room, meantime, is a virtual room where a chat session takes place. Technically, a chat room is really a channel, but the term "room" is used to promote the chat metaphor.
There's a big difference between chat rooms and IM, though: A chat room environment, typically handles two or people involved in one or many discussions. Instant messaging almost always involves one conversation between two people.
Several competing instant messaging systems exist. Unfortunately, there's no standard as of now. This means that both people need to use the same instant messaging system. That's important to remember both on the consumer side and the enterprise side of the IM world.