Emoticons replaces common emoticons in chat frames with image emoticons. (This is client side only for obvious reasons)
You can also right click on the ChatFrame Edit box to insert emoticons, and emoticons are parsed in mail messages too.
Thanks to Pazza for the emoticon images.
The settings window is in the Interface > Addons panel, and provides options for disabling emoticons in specific channels, as well as mail parsing, and the 'eye candy' setting.
When Eye Candy is enabled, then emoticons are parsed as you type into the chat frame. (They get turned back into regular text when you send the message because the images can't be sent, so this feature is just 'Eye candy' and is named thusly)
(Note: There may be some issues with Prat preventing the Edit Box Right-Click menu from appearing)
It's back. It's been a while since it was updated, but now it's been rewritten for WoW 4.0, enjoy.