Audio problem: The drummer in Oz's band's movements don't match the song that is heard when we first see them performing at Buffy's house.
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.
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.