Just asking if you had moved directories after installing, which doesn't sound like happened in your case.
The permissions questions relates around file system permissions to the emoticons directory (usually Linux installs rather than Windows - you don't say what OS you are using). [originally posted on jforum.net by GatorBait3]
Seems kinda silly to ask but have you tried reloading the cache of the Smilies by going to:
Admin Control Panel -> Cache
And then click on Reload on the line for smilies. It should show by default that there are 32 smilies. If it does not have a number or the number is zero then the path would be an issue but more than likely its just you need to reset the cache. I had to do the same when I first installed it.
Only had to do it once more after that.
[originally posted on jforum.net by confused2gether]