I hate to say this, but it sounds like a relationship I was in with someone I still care about a long time ago. Not to the fullest
she didn't treat me like crap, but it was an in and out relationship where at some point I had to acknowledge that she liked to be around me because I was "safe" and she knew for the most part what to expect from me.
I know you've said that you always have the option of cutting her off, but I'd like to re-emphasize an earier opinion. It is INCREDIBLY hard to cut someone out of your life when you love them, even if they cause you so much emotional pain (or drama). I know I tried to do it a couple of times, and even now still can't be around her too much because it just ends up with me re-thinking over that old decision.
Glad you decided the booty wasn't worth it because there is always someone out there for you who is actually worth your time. You just have to find them (don't even start, I know it's harder to do than say). The only way I'd have looked that option straight in the face would be if it was on terms of "friends w/ benefits" but that too would be a sham in sort order, since you'd had a past relationship with her.
As for your friend, I agree with what has been said earlier. Kindly ask him to mind his own business for awhile until everything works out. No matter what kind of opinion he says, or who's best interest he's doing this for, he's playing with fire, and it'd be really easy for him to all of the sudden end up in the middle of this with an "oh shit" look on his face.
Your wanting to still be friends with her cries out how much you care for her, so I really don't see you cutting her off unless you change jobs at this point. Good luck with her. I don't see you resolving this situation any time quickly, but be patient and figure out what you actually want between you and her in the future.
Oh btw, don't let that shit about "Always have to be right" get to you. I know how hard it is to let that go (Mine pulled the same on me, and nothing was more frustrating), but just remember that it is a cheap shot and should only work once. No reason to let it hurt you if they can't even think of anything original when they try to attack you.