Graham admin_
in the block {% block post_view %} under {# Get message #} where you see
{{post.body|raw}} (2 places) change it to this

{{post.body|replace({ ("http://xtgem.com/images/smilies"): "/smiley"})|raw }}

what this will do is fetch the images from your own folder /smiley instead of xtgems the actual image names must be the same as the xtgem ones