Lisa, just to put a few things in perspective: you're asking a bunch of middle-aged, somewhat conservative men for dating advice here. Just because a lot of us have a rather eccentric 'hobby' doesn't make us any more or less capable to answer your questions. I reckon that most of us have no meaningful experience, except as the cross-dressing husband in a (unhappy) relationship. In general, whenever someone on the internet gives you some advice, you might want to keep in mind that they usually have no stake in the outcome.
Some here seem to argue that the continuation of a marriage is more important than the personal happiness of one of the partners. This is a moral or even a religious discussion I'm not going to deal with. I just want to say that all is relative.
Your friend has the right to make his own choices (or mistakes). Your friend's wife has the right to know if he's not happy in his relationship. You all deserve your own happiness. You like him for who he is which is wonderful; make sure he likes you for who you are, not for what you enable.