The guy that started IMWatching.net saw my post about his site and sent me an email. He is a student at MIT and IMWatching is a school project. There is a bit more on the site now, including these statements regarding privacy in the FAQ.
I inquired about the response he has seen, and he reported that about 1000 people are watching nearly 6000 buddies through IMWatching.
What’s more, his mother is the director of a middle school media center, so he enjoyed reading about his creation in the context of libraries.