Oh God, yes, lawyer. And yes, fire him. In regards to OPs confusion about the innocent employees trepidation -- there is a reasonable fear of reprisals here. From you, from others on the team, and from the sexual harasser.
Reprisals are often not easily identified -- they can be subtle and social in nature. What often happens is that the person who reports harassment is then punished because people no longer want to talk to her. They keep her out of the loop on casual stuff, but lots of professional discussions happen in casual contexts. Over time, she gets iced out for reporting illegal behavior.
And then there is the fact that this person who has already shown a marked disrespect for women and a willingness to cross appropriate boundaries will know exactly why he has been fired. If you've ever been on the receiving end of a sustained campaign of abuse and harassment, that is not something to take lightly.
You should do everything you can to make sure she doesn't suffer for having reported illegal behavior, and you should reassure her that you'll have her back in whatever way you can. That might mean working out with her and HR what the best way to move forward is, keeping in mind that she has every reason to think she's going to get screwed over in this process, because that's what happens the vast majority of the time.
I'd say it's actually a huge vote of confidence in you that she brought this to you immediately.