It is, as many people have said before, a major turning point in the whole series' story. It's where we really learn that anyone - even the oh-so-lovely Angel - can become a horrible monster, and it's like someone's turned the lights down a little, and everything's a little darker and scarier and angstier than it was before.
What makes it even worse is that Angelus knows Buffy just as well as Angel did. He knows all her weaknesses, and how to exploit them to cause the most amount of pain and heartbreak possible, which is sort of what he feeds off. This is shown especially in the scene in the bedroom where she doesn't know about the loss of his soul yet, where he mocks her and hurts her as much as he can, and also in the scene at the end, where they have their first massive fight and he says 'you can't kill me'. It must have been truly amazing to write, and to watch being filmed and performed, and I can see why Joss likes it so much. It's where his series grows up.
