I like that theory, being as Buffy never referred to being in an institute until season six. It was a bit random to bring something that earth-shattering in Buffy's past out of nowhere.
I agree with the thoughts on Xander being a jerk in Dead Man's Party. Sure I can understand why he was pissed with Buffy, but he was absolutely horrible with her. I know that his feelings towards Angel were always a bit tainted due to his feelings for Buffy, but putting it all down to 'boy trouble' was crass even for him.
The rest of the episode is pretty good though, and is full of the funny stuff. I loved Buffy looking down to the scoobies when she jumped in and saved them all at the start. The way everyone just falls to the floor, and then Buffy sees Cordelia and just throws her down with them! Giles was a hoot too: "Do you like my mask? Isn't it pretty? It raises the dead. Americans!"