Scott-Favre, Jim and Janice Leach, Michael Cieslak and I discussed the hows and whys of editing a friend's (or spouses) work. The panel was well attended and a lot of fun.

The obvious conclusions are that you need to be kind, but also honest.

You do your friend no favors by saying their drek is really pretty good, but if you can find a good thing in it, that's something you should point out. "I really like the kitten." might not help, but "The dialog works well, and the villian is cool". is good.

It's also not helpful (to anyone) to point out flaws without some suggestion for how to fix them. Again, "The dialog sucks" doesn't help much, but "Your dialog is too stilted. Try reading it out loud and see what you'd say instead."