I found it a little odd that it was just the smell and taste that Agent Smith was repulsed by. If that was the case then why was he compelled to stay in the Matrix in the sequels?
Who says those were the ONLY reasons?? There were undoubtedly plenty of things about being in the Matrix that could seriously annoy Smith; smell is merely the only thing he happened to mention while talking to Morpheus. I would interpret the fact that he singled out smell as being the proverbial "straw that broke the camel's back". [seriously, thinking that something is the only thing that matters to someone because that's all that is mentioned aloud strikes me as kinda daft]
In reply to @Durakken: To my mind the notion that Smith has a choice whether or not to smell the Matrix is just wrong. Smith is an Agent inhabiting some poor coppertop's body, fully using it to get the job done. That level of control requires extensive infiltration of the brain and nervous system, a kind of integration really. An agent in a body has to see with that body's eyes and visual cortext, hear with that body's ears and auditory cortex - and yes, smell with that body's nose and olfactory cortex.
As to why Smith chooses to stay after 'the Neo incident': (a) Possibly the urge to destroy Neo has become an overriding consideration; (b) Perhaps being changed by Neo includes a fundamental change in how he processes smell; (c) Perhaps inhabiting multiple bodies at once has simply made him 'nose blind'.
The answer comes in a form of a question... "What Smell?"
Humans in the Matrix have smell because it's being produced by the Matrix. Smith can smell the smells because he allows himself to. He doesn't have to and if they're replicating human senses, he wouldn't "smell" humans either. So when you ask, "What Smell?" it must make you realize, there is no smell to be smelt but rather there is a mind that is believing it is smelling something erroneously. ie Agent Smith is nuts if he thinks he is smelling things and that is the reason he wants to leave the Matrix. It's completely justifiable too for why he goes insane. The directing this insanity at humans is just a symptom of nuttiness. Psychologically, he's just lashing out at the things he can lash out at and making up reasons for his hatred.