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Hi Luminosity, this is not going to help fix your problem but more to inform you that you do have a problem as I personally have 3 sites all using comments and smilies without problems so to answer one of your questions - yes it is possible to have smilies in comments.
My sites are standard installs as comes out of the XOOPS box - meaning I did nothing to get them to work.
Good luck,
Marty.