I Only Have Eyes For You - S2-E19
Revealing mistake: After Buffy has entered the wasp-filled school there's a shot of the others standing outside waiting for her. In the establishing long shot if you look closely you can see they used the same shot as earlier in the episode - Buffy is standing there with them. (00:34:10)
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.