I think you probably did it correctly, but you're expecting a bit too much from Dreamweaver. Dreamweaver won't render the actual SMARTY code, but should just display raw smarty code as if it were HTML. Only the non-smarty parts of your templates will render properly as HTML. Basically, this lets you create an HTML file with a .tpl extension, or to view an HTML file with a .tpl extension. Any code that is not part of an HTML tag will show up as text. So it's not a total WYSIWYG solution, but it's better than nothing. You should at least be able to change the layout of your pages and drag bits of SMARY code around the page to place it in different locations in your template. Regardless of how it appears in Dreamweaver, you'll still need a good understanding of SMARY tags if you hope to be able to modify the templates. To make the actual SMARTY code markup render in DreamweaverMX would require writing an entire server model that could properly enterpret all the various SMARTY tags. While you could probably build one based on the PHP server model, I doubt anyone other than serious SMARTY / Dreamweaver extension developers could attempt such a feat. I've built some DreamweaverMX extensions for the PHP-MySQL server model and I can assure you, it would be difficult (but not impossible) to write an extension that would render SMARTY tags.
Getting back into x-cart dev after a long hiatus. Modded lots of x-carts from version 3.1.x to 4.1.x. Developer of ImageScaler mod, Pre-login per user coupon mod, Wordpress feed mod, DigitalSubscriptions mod, Phonetic bulk download keys addon for DownloadExpander mod, Serial Number Generator for ESD products, Custom CMS/LMS integrations, external products mod, and more.