First off, good dialogue is *not* conversation. There are no "throwaway" lines in dialogue. Every line should advance the plot, reveal character, or heighten conflict.
He says good dialogue is always:
* in conflict
|Here's something colorful. Skittles. Mmm.|
His points are that dialogue needs to reveal conflict, reveal character, and to provide immediacy--meaning it speeds up the action of the story, makes it seem like it's happening *now* and not just being told about. Funny, telling through dialogue ends up being one of the best ways to "show not tell."
Frey suggests that in the editing phase, we should go back and reexamine ALL dialogue and determine where it could be fresher, more unexpected, create greater tension, and throw a greater impact. Sigh. It's really hard to do!
For instance, Cookie Monster. The name--it's a juxtaposition of ideas. And it's a beloved character who has endured over 30 years in children's and adults' minds.