Continuity mistake: In the scene where Buffy and Kathy are deliberately infuriating each other (tapping pencils and cracking eggs) there are several lights on throughout the room (on Buffy's desk, above Kathy's computer, in the kitchenette) yet when Buffy turns out her bedside lamp, the entire area is thrown into darkness.
Continuity mistake: When the portal is opened Buffy crawls around to the other side of her bed yet just as the portal closes there is a wide shot and she isn't next to the bed.
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.