Stand Up, Stand Off?

One of the many new dilemma's I've been facing recently is that of my relationship to other people in my newly created team. Many of these people (currently) are close personal friends, are were long before I was elevated to their line management. All are around my age, and we enjoy having a laugh together (it's an effective group coping strategy for what is a fairly stressful role). However, now I'm their boss. I assign their work, officially evaluate their performance, and should they step out of line, it'll be my responsibility to discipline them.. or at least, start that process. Are these two roles compatible?

The accepted wisdom is largely "no". You can't be a friend and a manager, as one directly impedes on the other, it's too much of a conflict of interest. I'm not particularly prepared however, to cut ties and say "right, now I've been promoted I don't want to be your friend". Maybe it's somewhat inevitable eventually, the stresses and strains of our work relationships will cool the personal ones - certainly when it comes around to performance review and pay review it would be easy for them to feel betrayed by a poor rating.

In situations where the needs of my "staff" conflict with the objectives of my superiors, whose side do I take? Is compromise a "lose-lose" situation where both sides feel I've not met my obligations to them?

And what about new starters? How do I avoid them feeling like second class members of the team, where others receive preferential treatment, without compromising the need for strong leadership and direction in order to mould them in the way the company requires.

Some tough decisions and sticky situations loom I think. More than ever I feel I don't understand people, their emotions or the nature of relationships well enough.