Who the **** knows. I think they just wanted to keep him in the 3rd movie for an interesting cliffhanger for the end of the 2nd, that or he just hid really well.
As defined in the 2nd movie in the scene with the Architect, the Architect is the father of the matrix and the Oracle is the mother. I doubt that the Oracle would have created Smith, because even then it's more likely the Architect made him. That wo…