I tested this out on my site and here at IM2 by changing the settings for my account and viewing the results through another browser platform which viewed the site from a non-member perspective. It plainly showed me as online within the "Who is Online" block when I set "Show me online" to "Only friends" for my account at PCP-->Profile-->Profile Settings-->Privacy.
[strike]As a side note, and quite possibly a different problem altogether, my installation of IM 1.4 only shows the above setting option under the Privacy section of PCP. I noticed the following additional variables here at IM2:
- Always show my e-mail address
- Accept private message
- Display my web information
- Display my messengers references
- Display my personal information
After viewing my settings in ACP, I realised that I had set the above variables as constants by setting "Override user choices" to "Yes" for these options.