James Robertson points to a post by CorporateBlogging.Info claiming IBM is running 3600 internal blogs:

"Through the central blog dashboard at the intranet W3, IBMers now can find more than 3,600 blogs written by their co-workers. As of June 13 there were 3,612 internal blogs with 30,429 posts. Internal blogging is still at a stage of testing and trying at IBM but the number of blogs is growing rapidly -- and they are appreciated, with everything from water cooler talk to discussions about IBM's business strategies."

3600?  According to a Fast Company April 2004 article, IBM started internal blogging in December 2004, had 500 internal by February 2004 and has grown 600% in the last year:

"Internal blogs are more integrated into a worker's regular daily communications. IBM began blogging in December, and by February, some 500 employees in more than 30 countries were using it to discuss software development projects and business strategies. And while blogs' inherently open, anarchic nature may be unsettling, Mike Wing, IBM's vice president of intranet strategy, believes their simplicity and informality could give them an edge. "It may be an easy, comfortable medium for people to be given permission to publish what they feel like publishing," he says."

Phil Borremans (from IBM) gives an example of how he has used an internal blog's RSS output as a notification tool to aid his project management communication:

"I have used my internal blog for project management with a team of colleagues a couple of months ago. We were testing a new product and needed to keep a virtual team updated on the progress we made. Through RSS feeds this was automatic and (very important at our company) didn't clutter the mailbox.

The easy way to comment on milestones or issues increased the interaction in the team compared to regular phonecalls or sending out "update e-mails"."

What about Microsoft?  Well, according to Paul Vick, a Technical Lead on the Visual Basic .Net product, wrote over 2 years ago:

"Scoble wrote yesterday about the fact that even though there are a growing number of MS people with external blogs (enough to force the move off of GDN), there hasn't been a commensurate number of internal blogs. In fact, I'd have to say that pretty much most of the internal blogs that I've read are a dismal failure, and I've dropped every single one out of NewsGator. Robert speculates that the problem has to do with discoverability and linking, but I think the problem goes deeper than that."

Now, this was two years ago, and one opinion, but I'd agree that in those days, there was a lot of experimenting, and few Microsoft internal blogs with any real purpose - lots of noise.  Things have moved on in those two years. I've subscribed to number of really useful and insightful blogs giving me visiblity into - and a better understanding - of different parts of the Microsoft business I'd otherwise know little about in the normal scheme of things. 

What makes the internal blogs really useful is RSS - it isn't like subscribing to an internal distribution email alias - the thoughts, links and comments become an archive of knowledge and conversations, captured in the blogs - filtered and distributed by the magic of RSS in a spam-free method. All potentially discoverable through search applications.  Internal blogs can also an effective venting and ranting platform, pointing out the good and the bad of the internal workings of a business and the competition in a safe, behind-the-firewall, environment.

Given their potential I'm quite sure internal blogs will soon become a default feature of the internal communication / KM landscape for businesses large and small.