An emoticon, often called a smiley, is a sequence of printable characters such as :), :o), ^_^, or :-( or a small image that is intended to represent a human facial expression and convey an emotion.

The creation of the original smiley face is often attributed to Harvey R. Ball, a freelance graphic designer, artist and co-owner of a public relations and advertising company based in Worcester back in 1963 to help a bitter fallout inside an insurance company that had recently gone through a merger.

Heard from a lovely lady called Debbie yesterday, she had some additional information regarding the incredible Harvey Ball, it could take me a while to do some more research on the subject so that I can add it here but in the mean time I will share with you some links that Debbie shared with me .
World Smile Foundation | World Smile Day | Smiley Store Smiley History

In September 1970 two brothers from Phillidelphia, Murray and Bernard Spain, were busy searching for a peace symbol for the hippy movement that was simple and conveyed a sense of happiness and well being. They remembered having seen smiley faces floating around for years in the advertising business and from that inspiration created the Smiley Button. It turned out to be a massive hit and by the end of 1972 it was estimated that over 50 million buttons had been sold.

The first known ASCII versions of emoticons (as smiley faces are also known as), were first used in the PLATO IV program as early as 1972. PLATO, an acronym for Programmed Logic for Automatic Teaching Operations, was one of the first generalized Computer assisted instruction systems, originally built by the University of Illinois. Although the project was a failure economically and had been replaced by other technologies when it was finally turned off in the 1990s, PLATO though had nonetheless pioneered key concepts such as online forums and message boards, online testing, email, chat rooms, picture languages, instant messaging, remote screen sharing, and multiplayer online games.

The creator of the original ASCII emoticons :-) and :-(, with a specific suggestion that they be used to express emotion in order so that people reading a text on a message board could discern whether something that was written was a joke or not, was Scott Fahlman; the original proposal made by Fahlman on Carnegie Mellon University CS general board on September 19, 1982 (at 11:44) was retrieved from old backup tapes on September 10, 2002, by Jeff Baird. See Fahlman's website for a full account of the thread.