It's like being hit in the stomach (in a good way, if there's such a thing) Especially when unexpected and it makes you feel worthy - at least on a physical level (always a start). Personally to be honest, I usually blow such chances. I'll usually just smile back, blush a bit and act all awkward but walk away feeling good, but frustrated at my own reactions and tallying up another missed opportunity. It's a two way thing with me...of course I love it, but again it's like a kissing thin air. just a mirage. but at least a reminder that you possibilities are still open, providing you learn to take hold of them.
I smile back cos' it's polite and a girl smiling at me is nice so I reciprocate (unless it's a girl who I actually know and really like I mean then I want to more but sometimes I'm too nervous in the moment and screw it up).
The thought train is sorta' like "huh... what? Why did she just smile at me?"
Depends on the type of smile and the rest of the body language, but generally it's she thinks I'm cute/hot. Don't really pay it much attention because it happens so often. I always smile/smirk back at the least.