Continuity mistake: During season 7 we are told several times that the First cannot take corporeal form, ie. it cannot touch things. However, in its first appearance in the season 3 episode 'Amends', when it manifests as Jenny Calender and runs its fingers through Angel's hair you can see his hair moving underneath her fingers. It wouldn't be able to do this if it weren't corporeal. (00:15:50)
Factual error: In Amends, season three, one of the movies playing at the theater is 'Abilene,' which was not released until March 13, 1999 ; three months after this episode was aired (and probably five months after it was filmed, which is interesting). (00:43:10)
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.