When Daniel first met Molly he fell in love at first sight. She was engaged to Connor at the time, so she wasn't looking at Daniel the same way that he was looking at her. In time, though, she also fell in love with him and she broke off her engagement. Unfortunately, shortly after her relationship with Daniel started to blossom, Molly suffered a recurrance of cancer and she was told that she was going to die.
Even though he was shocked, they finally get back together and after a while he proposes to her. In the season finale of season 3, to Daniel's shock and dejection, Molly dies. He is left grieving and in an emotional depression. To the point, he becomes victim to a cult called the Community of the Phoenix. The leader Bennett, promised Daniel that if he reached Level 7, he'd be reunited with Molly. It was only half-true, if it can be called that. Bennett gave Danniel and a member Natalie, a type of drug in their drinks that causes them to hallucinate. By making them sit in front of each other, they believe the other to be the deceased loved one.
Betty and Mrs. Meade eventually find them and interupt the ceremony. At some point, either Molly's spirit or her hallucination tells Daniel he needs to wake up. She's dead and she can't come back. Daniel breaks down saying he can't because he never got to say good-bye. Betty, who goes along to calm him down (pretends to be Molly) and tells him to tell her good-bye. Daniel apparently kisses and sees Betty in front of him.
After leaving the cult and Daniel returns to his and Molly's old apartment clearing out some of her things. He asks if they kissed. Betty admits it kinda happened. She then says he kissed her on the eyebrow, she's a lot shorter than Molly.