Friends hi-fi system not very good, what do you do or say?

Interesting question. Any comment I would make would be heavily influenced by a few things. 1) do they like the system? If so then I would be complimentary. If they like it then that is all that matters. Peoples ears and listening habits are different so don't judge.  2) Are they asking for my advice? I would try to determine what they wanted to improve and make a suggestion. Tread lightly unless they are really unhappy. 

I am pretty open minded and have had people listen to my system plenty of times. For many it's amazing, but for some with high level equipment I could tell they might think something here or there could be improved. Buddy of mine up the street has some Klipsch Heresys hooked up to a vintage Marantz with a VPI table and Ortofon Black cartridge. He loves it.  I have a hard time with horn loaded speakers, especially in nearfield listening but it works for him. I think he views my main stystem as being a little lacking on the top end but good otherwise.  He is younger than me though and I am sure his hearing is probably less sensitive. Lots of variables as to what sounds good to some and not others. 

Forgot to address the " do I mention my system question". I don't really talk about mine in detail unless asked. I'll mention it in conversation and invite someone to listen if they are interested. Unless they want to know details, I keep it there. 

I usually speak of how my understanding of audio equipment changed over the years and how certain little changes MADE A BIG DIFFERENCE.  Simple no cost changes like moving speakers away from walls or using furniture to limit first reflection will lead to owner asking about what else can be done. 

Yea, I've heard one $2500 in total system that really sounded good, and I remember a $70,000 that really stank.  In this hobby, there can be no correlation between cost and quality.

If he asks your opinion, give it.  If he doesn't, let him enjoy his stereo.  Just try to not get invited over to listen.  Offer to have him come over your house, and maybe he'll figure it out on his own and ask advise.

I remeber an old friend who was an absolutly terrible cook, and he would always invite us over for dinner . . . .

This situation has happened to me twice and both times they wanted my opinion -- neither was awful but to improve would have required better speaker placement and room treatment, both of which were not acceptable to their wives--so all i said was "sounds great, let's do a gummy--and of course after that everything sounds better--could have been a transistor radio and would have been fine.