I don't think that smileys worked before. Its because it uses relative urls for the smiley and outside of the site that doesn't work. Smileys in the blog also don't work in the outgoing rss feed for the same reason. I think probably I should just remove the smiley from the toolbar on the contact module.
btw, when you copy html content from a page or email and paste it into the editor, you should use the paste as text toolbar item to paste it in order to strip out the html. Thats why there was an error in your post. It works sometimes to paste the html but if the part you copied is missing an end tag or something you get the error because NeatHtml is validating the markup to prevent xss.