The fact that he has lied to you means that (2) is also a lie, perhaps to himself as much as anyone.
Unfortunately in these situations, people always under-estimate how addictive and intoxicating it can be when someone else desires you. So boundaries are crossed all the time and meanwhile your H will be telling himself and you that since nothing physical has yet happened, it is not going to happen.
Until it does.
Only then will your H confront the fact that he is being unfaithful.
The truth is, he is being unfaithful now and you must not be passive about this. If it's unacceptable to you and is causing you pain, you insist that this relationship is severed completely.
And then have lots of conversations and perhaps some counselling about unsafe friendships, dealing with temptation and the challenge of affair-proofing your future marriage.
Please don't ever be afraid to state your conditions - and if he puts this friendship above your marriage, or tells you that you are being jealous and unreasonable, then vote with your feet.