Revealing mistake: Throughout almost the entire sword fight between Buffy and Angel, from the far away shots, its clear that the actors are stunt doubles. It's very visible when there is a shot from the top. (00:34:05)
Revealing mistake: When Buffy and Angel are sword-fighting, the camera pans up and to the side, you can see David Boreanaz's stunt double. His hair line is farther back then David Boreanaz's.
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.