Audio problem: While Faith is stabbing the demon in his apartment, we hear the sound of her knife going through, and him yelling in pain. However, the last sound of her stabbing him comes a little late: The knife isn't even touching him.
Revealing mistake: After Faith brings Angelus back, when she goes to punch him and he blocks, the stuntman switch is very obvious - he's noticeably taller, has different hair and doesn't even seem to be wearing any vampire make-up.
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.