Continuity mistake: Willow's hair changes position between shots when the vampire brushes her hair back and kisses her.
Continuity mistake: Whenever we see the two Willows together in this episode we see that Vampire Willow is understandably very pale in comparison to the living Willow. However, in the library with Cordelia, when Vampire Willow says 'How about dinner?' her face is no longer pale.
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.