Wanderers goalkeeper Aaron McCarey, a former Walsall loanee, was the hero - saving from Craig Westcarr and Andy Taylor - as the hosts won 4-2 on penalties at Molineux following a 2-2 draw after 90 minutes.
"In the first half Wolves were much the better team and we never pressed them and let them play," Smith said. "But in the second half I thought we were the better team and were the main aggressors.
"They had somewhat astonishingly won a penalty but the lads came back and had the game gone into extra time then maybe we would have won.
"But as it was the game went down to penalties and a lad who we gave his debut to made two good saves and we go out of the cup."
Smith was left bemused by the awarding of Wolves' second-half penalty after Adam Chambers was penalised for pulling down Danny Batth in the area. Sako's initial spot-kick was saved by Richard O'Donnell but the Frenchman reacted fastest to turn home the rebound.
"There was nothing to it," Smith said. "There was a coming together at a corner so I think Mr Deadman (referee) should be giving penalties for every corner that is taken. Unfortunately we have a bit of history with him.
"But I don't want to talk about him and gloss over the second-half performance, which I thought was really good against a strong side.
"The run that we have been given - five away games in six - was always going to be tough but there have been some positives from it and we will take a lot from the second-half performance.
"We forced them into a lot of mistakes and they were hanging on at the end."
- Sports & Recreation
- Bakary Sako
- Craig Westcarr
- Ashley Hemmings