me->p_flags |= PFOBSERV;  /* future clients may understand this */

I think it's pretty clear that it was added so clients could note observers in
the player list and otherwise handle being in observer mode better.  I know
why it isn't sent or always set and can fix it. 

COW handles this pretty well.  It will display the torp count and kills of the
person observed in the dashboard (for dashboard != LAB).  It looks like
someone intended to sort the player list too:

 * TODO:
 * Sort observers separatly: opserver if (pl->p_flags & PFOBSERV) is true.