Smith was expelled from the Program and was no longer an Agent. Remember at the beginning when he sends his radio receiver to Neo and Neo opens it? That was Smith's communication and link to the Program, and it was showing he was no longer involved.

As far as his purpose, I don't think he's still protecting the Matrix. I think he's got other priorities. You need to listen to his monologue in front of Morpheus when he's trying to interrogate him. He says he's sick of the humans, they discuss him, and he wants out of the Matrix. Remember also that Smith pulled out his earpiece when he did this too, symbolizing him temporarily severing his own connection with the Program to allow Morpheus and us to see what he's true intentions are.

It's quite a possibility that the Agent had a live body and was plugged into the Matrix. When he was killed, his body died, but he became a part of the hard code of the system, just like a virus. For example, remember Lawnmower Man? He uploaded his body into the computer systems and was basically a virus. I think this follows the same principle.

Now all Smith needs to figure out is how to get back out of it to complete his goals of freedom. I'm not sure if his transition into Bane was exactly that, or just kind of like an "off-shoot" of Smith. A foray into reality, or what we currently comprehend as reality.