That's not easy to hear/do in ANY format of relationship. It needs to be done sensitively, and you may well lose the friendship.. but I hope that won't stop you taking a chance on new love in the future...
One question... is this the first time you have attempted to **start a meaningful relationship** with someone outside your marriage? If so, be really sure that the change of heart on your wife's part isn't about some other uncertainty to do with living poly. It might be crushing for your friend to deal with the rejection, but the real damage would come if she then changed her mind again and decided she wants him after all.
btw, I **'s the words in the above paragraph because you described your wife escalating the relationship with your friend as "bringing him in". One of the things that has helped me and my "metamor" (my bf's wife) is realising that the relationship they each have with me is unique and special (as is the relationship they have together, still), and not just an enhancement to their relationship. Does that make sense? I guess it might not help you, but as someone quite new to this too, I thought I would offer the "leg up" if it helps