You observe %2 sharpening a knife, obviously preparing to do the famous Lorena Bobbitt impression...
%2 is sharpening a knife and eyeing you -- obviously preparing to do the famous Lorena Bobbitt impression...
You sharpen your knife, eyeing %1 -- preparing to do the famous Lorena Bobbitt impression...
You observe %2 sharpening his/her knife, eyeing %1 -- obviously preparing to do the famous Lorena Bobbitt impression...