Continuity mistake: When Buffy is fighting Kendra the fragments of the table she is thrown onto have disappeared when she stands up again. (00:42:40)
Revealing mistake: Although the mirror in Buffy's room is mostly covered by photos, Angel's reflection can be seen for a split second as he walks past it to pick up the photo of Buffy ice-skating.
Chosen answer: Angel is saying that he is still jealous and Buffy recognizes that this is his way of saying he wishes that they could be together. That is why they both smile.