Here is my opinion & suggestion..... Hope it helps.

First off I have to say that by not dealing with this situation head on when it first reared its ugly head you almost allowed it by not forbidding the inappropriate behavior toward your wife and while beating the crap out of this man would probably make you (and me) feel better it will not solve the problem, therefore, I offer the solution of combining #3 & #4 mixed with a little of #5 into your problem equation... have you and your wife go to your friend (with you being the enforcer) and talk to him - letting him know that his behavior is not welcomed by your wife and that you find it inappropriate and that it must stop or the friendship will have to end... DO NOT Back Down!

I would also advice that you give him two weeks to maul over what was said before you try to connect with him again... I have found that we as humans need time to recover from any form of rejection before we are ready to move forward again... to do what we should.