A guy I used to work with wrote this up about a week ago. It goes along very well with the discussion.
Your friend is wrong in his description of Tolkien's book. I here quote the relevant passage:
Does this detract from the book? Does it make everything grey? Does it make the villains too good?
No. This is one of my favorite parts in LotR. Why? Because it is true. War is a horrible thing, where men fight and die for good causes and also fight and die for bad ones. But not all the men who fight and die for evil causes are doing so willingly. That is like arguing that every German in WWII was a Nazi.
If Tolkien had taken your friend's position and treated the evil men no better than the orcs, then LotR would not be the great book that it is. The reason LotR is so great is because it is so true; true to life; true to reality; true to God. Men are men whatever setting you put them in, and men are never beyond redemption.
I am not ashamed of pitying the soldier that died fighting for Sauron, just like I am not ashamed of pitying many of the German soldiers who fought a war that they did not wish to. Does realizing that a German soldier would rather have stayed quietly at home detract from Hitler's evil? No it doesn't. Nor does it detract from the villains in LotR. Rather, it makes them real. We are not fighting cardboard cutouts of generic villains, but real men.
I will not pity Satan and his Demons when they are finally defeated. Likewise, I do not pity Sauron and his orcs. They are creatures of evil, spawned of evil, in direct opposition and rebellion from God. But men are different. And I am very glad that Tolkien recognized that. No character in LotR is treated as being as evil as an orc. The only time the comparison is made is when Frodo, upon first being told the story of the ring, reacts in fear, pronouncing judgment on Gollum and saying that he was no better than an orc and deserved death. And do you remember Gandalf's response? "Deserves it! I daresay he does. Many that live deserve death. And some that die deserve life. Can you give it to them? Then do not be too eager to deal out death in judgment"
I believe that there are very clear cases where death is deserved and necessary (and even prescribed by scripture). Hitler would have deserved death, had we captured him. But to extend this to every soldier in the German army, as your friend is logically doing, is incorrect.
I only bring this up because otherwise, I really appreciated your friend's comments. This is more of a 'misapplication' thing than a core disagreement. Also, I haven't seen "The Two Towers" Extended Edition (just the regular one), but would not be surprised to learn they had botched the whole thing up and made it sound more like a greyscale condoning of evil men. (if I were to grade the characters in the movie based on how similar they were to the books, most get D's and F's; the deterioration of themes and messages is not far behind).
A little bit more on topic, there is no correct answer as to what makes a perfect villain. It all depends on the story you want to tell. However, there are two things that every villain must portray in order to be a good villain:
Firstly, all villains have motivation. A goal. Something driving them. No villains have been evil just because they enjoy being evil. A villain must have a believable motivation just like the hero must have a believable motivation. A book where there was no clear reason why the hero was doing what he was doing wouldn't be good. The same holds for the villain.
Secondly, it is critically important that there be differences. If you wish to highlight similarities between hero and villain, by all means go ahead. I'm sure that there will be plenty to find, for we are all fallen. HOWEVER, it is vital that you establish that
there are differences! The hero is good, the villain is evil. It is only a tiny step between the two, and yet it is also wider than the universe. Too many modern books get the tiny gap, but in doing so fail to illustrate the vast gulf.
Those are the two most important things when creating a good villain. After that, it all depends on what story you are trying to tell.
EDIT: Oops, didn't realize this topic was that old. Despite being third one on the list.