I'm almost certain that I heard James Cameron confirm in the commentary to the DVD that it was, in fact, the Terminator's dead flesh rotting that generated the smell. That's why there's a fly crawling around on his head as he's reading the book. He's dead by that point. "Yer dead, honey." Maybe that's also why he's noticably paler in the second half in the film? He's white as a sheet in the "get out" sceen.
Hey! That's another contradiction between T1 and T2 that I forgot about. "Will these heal up?" "Yes." "Good. If you can't pass for human you're not much good to us." I don't know, maybe they only heal up after you take the bullet out, and since he never took them out in T1 . . .
. . . but wait, that makes no sense. Real living tissue - which is what he is - heals OVER bullets. It happens all the time. There are people walking around with all kinds of things stuck inside them. So, the only explanation that works is that he took enough bullets to suffer catastrophic, life ending trauma to his flesh in T1, so it couldn't heal. And since he took even more in T2 . . . well . . .
As to the "phase plasma rifle" line: this, like "I'll be back", was a very risky move by Cameron. The film is obviously stepping outside itself and laughing at itself a little. Logically, why would the Terminator tell the guy he's going to kill that he'll be back. Cameron said in the commentary that they were VERY nervous about including that line; they knew it could bomb, injecting humor into a film like this. When they showed it to a test audience and everyone laughed, they felt better about it. Imagine that, the most famous line in the movie and the most famous line in Arnold's career and one of the most famous lines in movie history almost never happened.
They went and did the same thing in T2 when they played "Bad to the Bone." Again, very risky. But it worked. Both times. I remember seeing T2 in the theaters and everyone laughing.
T3, with the glasses . . . tumbleweed.