All the credit for this plugin goes to Rich Fuller and is entirely based on his tutorial for hacking BuddyPress to remove non-friend updates from the activity stream. I simply packaged it up and made it a plugin, because I believe that it is an extremely useful modification to BuddyPress from a community-building perspective, and I wanted it to be easily available to whoever wants it.
Removing non-friend updates from the activity stream makes sense for a number of reasons. It builds meaningful relationships between community members who have chosen to be friends. Instead of seeing all updates for all users of the community, the user will be better able to keep up with his friends by seeing only their updates, which are probably of greater interest to him. This will enrich the user’s experience on your site far more than if you throw updates from all members at him. For a very active BuddyPress community, all updates can be simply too much information to process and can cause the user to devalue your site.
The Friends-Only Activity Stream plugin will limit the activity stream for general users to postings from their friends only. The admin user will see all activities, regardless of friendship. This plugin removes activity stream postings from non-friends all together with the exception of the admin and public groups. Right now WPMU.org is the only place you can download it. It should also be available in the WordPress.org repo soon. Simply install it, activate it, and it works! Many thanks to Rich Fuller for his work on this handy hack.