iMessage in iOS 5 brings the functionality of iPhone messaging to all of your iOS devices―iPhone, iPad and iPod touch. Built right into the Messages app, iMessage allows you to easily send text messages, photos, videos or contact information to a person or a group on other iOS 5 devices over Wi-Fi or 3G.

iMessages are automatically pushed to all your iOS 5 devices, making it easy to maintain one conversation across your iPhone, iPad and iPod touch. iMessage also features delivery and read receipts, typing indication and secure end-to-end encryption.
What does iMessage do and How
It’s built into your iOS’s Messaging app (the same one you already send Texts in). When you go to text someone, iOS 5 will automatically detect if that person is using an iOS 5 device & send it as an iMessage. If they aren’t using iOS 5, it just sends it as a Text automatically. The End-user does NOTHING different that what you do today.

Benefits of iMessage versus just Texting?
-iMessages don’t count against texting plans.
-iMessages will tell you if your message is delivered (and Read, which is optional)
-There is no character limit, unlike the 160 characters in SMS
-iMessages use data (ex. 1KB), so you iMessage people internationally cheaper than SMS
-iMessage works on iPod touch, iPad
-Group Messaging
-iMessage works on Edge & 3G & Wifi (Good for us AT&T users with no reception
Basically, iMessage lets you communicate with another device for free, granted of course that their device runs iOS 5. Yes, you read that right, you will be able to send SMS for free. iMessage integrates beautifully with the iOS 5, because the OS can ping a contact and determine if he or she runs the same OS and have the iMessage option enabled.

In the above screenshot, if you are sending an SMS to someone with no iMessage capability, the “Send” button will be displayed in green. But if the recipient runs an iOS 5 and had iMessage enabled, the “Send” button will be displayed in blue. Messages that are sent without iMessage will be counted against your SMS text messaging plan. In addition, if you create a new message and browse through your address book, iOS 5 will also display a blue chat bubble next to the contact’s name, indicating that they have iMessage enabled. iOS 5 will also have the ability to sync your messages across your iOS devices.
Read More in iOS 5 :-
- Apple’s Annual Event WWDC 2011
- iOS 5 Excludes Image Editing Tools for iPhone 3GS
- iOS 5 Home Screen Demo(Video)
- MuscleNerd’s Tweets
roof of iOS 5 Jailbreak - iOS 5 to include Facebook And Twitter Integration

I am trying to iMessage with my friend who just updated to iOS 5 and it will only let us send SMS – any ideas why? We both have our iMessages turned “on” but are still only seeing the green bubbles
I think “free” is a bit of a misnomer. On the iPhone, iMessages won’t count against your texting plan, but unless you’re using wifi they will count against your iPhone’s data plan.