And that's also a valid interpretation of the episode. In fact, I'd say it's not incompatible with mine. We don't have to make one side the good guys and the other side the bad guys. It's possible for everyone to be a little bit wrong.

I think there's fakeness in the way the Scoobies are all lying to themselves as well. I don't think it's a coincidence that this is the episode right before everything falls apart - Xander and Anya's wedding, then Buffy's illusions about Spike, and finally Willow's issues with magic. They're all pretending that everything is under control when it's clearly not.

That's the beauty of this show - polysemy. :)