@sgaffney86,
Hmmm, man finds out he's about to be a dad, freaks out and decides to have an affair, comes to his senses when the child is born and thinks maybe he needs to step up and meet his obligations then the mistress tries the old blackmail bit, using both the I'll reveal the affair "out of anger" and the "you'll end up alone" lines.
OK, the advice: He's no great catch. He's got a family. He's got a baby who can benefit from a safe, stable and hopefully loving household (if that is what he is going to provide.) Let him go and if you really care for him, encourage him to give his marriage his best shot. Make it amicable and work might be a little awkward, but you'll survive it. You don't mention how much your co-workers know. Hopefully very little.
Second piece of advice: Look in the mirror. Affair with a married man whose wife is pregnant? Going to spill the affair to get even? "End up alone?" Really? Do you want someone who only wants you because they are scared of being alone?