I know that you can use smilies :) but have not used them for quite a while until now that i remembered. Geekaholic have the full instruction but i decided to share it here aswell but it is more of short cut, i suggest to read more from he's blog to learn and understand more about smilies.
How do you like to have Smilies on your blog? Some blogger have already use smilies and some are not because either you have not aware that you can use them and not just yahoo messenger or you don't know how to.
Here's what to do:
Go to your Dashboard - Layout - Edit HTML then Hit Ctrl+F type </head> and place the code below before closing the head.