Continuity mistake: When Buffy is hitting the punching bag near the end of the episode and Riley comes in she has bandages wrapped around both her hands but in the close up shot there is only a bandage on her left hand.
Continuity mistake: After Riley stakes Spike and Spike decides to drink, he is shown opening the bottle. The camera shows Riley and then goes back to Spike. Spike is holding the bottle, lid still on, then he goes to open it again.
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.