Smile Dog is not real. In the 1990s, the Photoshopped image of a smiling dog (smile.jpg) began circulating on Internet forums (reportedly beginning with Usenet.com) along with a fictional horror story claiming that viewing the photo could cause insanity and/or death.
As the story goes, a novice writer visited a woman whom he intended to interview. Upon arrival, he found her locked in her room and traumatized by an image of a smiling dog found on a floppy disk. According to an urban legend, once the image is viewed, the person sees it constantly in his mind's eye as a result of epileptic seizures.