It's hard. I know the feeling. A lot of times, people don't realize that behind that IM and behind those typed out words (typos and all) and behind that computer monitor is a real person. Often, friends online are associated as "child predators" and "60 year old men who pose as 13 year olds", so that stereotype usually scares a lot of parents and creates a barrier between real life and virtual life. That's my problem. But enough about what's happening here.
Online relationships are extremely difficult, moreso than long distance relationships. Online, it's hard to see the person's face, or hear their voice (unless you have the technology to do so). Not only are you separated by a computer and distance, but also your reputation.
I can see why your friend does not want to take the next step. He's afraid of being disappointed (which is silly because you are such a wonderful person with a beautiful personality) or you being disappointed and as a result, he's disappointed you. A very common problem in real life, so how should you treat this? Exactly how you would treat it in real life. Let it go. Don't push it, though it is an extreme disappointment. He knows what a great friend you are, simply in the way he is afraid to face the fact of going in a new direction. All you can do right now is be that friend. At the same time, move on with your life. I'm not saying forget about him, but realize that life is still offering you opportunities, online and offline. It will keep you from thinking about him 24/7, and once you continue on with life, perhaps he will see what a fulfilling life you have and thus want to be a part of it.
Hope you'll feel better soon.