Continuity mistake: Before the gang head over to the high school basement at the beginning of the episode, Dawn's hair is straight with curly ends. But once they're in the basement her hair is suddenly curled all over.
Plot hole: When Andrew wakes up, Anya mentions the First posing as Warren to make him kill Jonathan. Jonathan's body hasn't been found and the only time Andrew became ready to talk, he was knocked unconscious. They shouldn't have a clue about Jonathan's murder.
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.