This looks like an MXP issue. Most clients other than MC or zMUD very simply aren't capable of handling MXP tags and will display raw code... For MU*s that intend to run with MXP, this pretty much forces the issue of crap clients with thier players. I'd advise supplying an easy link to both www.zuggsoft.com and the Nick's download page and pretty well insisting your players get one or the other, MC being prefered of course :) If they won't get a real client, they can suffer thru a less than optimal mudding experience until they figure out how to configure their personal settings to not get MXP output.
I'm not sure you can get rid of it mudwide without extensive recoding or finding a diff version of the src. However, if you type MXP youll get the available settings for MXP support. Each player without an MXP capable client will have to define their own settings as far as I know.
You clearly have an MXP-enabled version of SMAUG. You could use the non-MXP version, or patch it to disable the MXP recognition, if you don't want to use it at all.
Clients should not be displaying the MXP stuff if they can't handle it, however some earlier versions of zMUD might be doing that. You could suggest they upgrade their zMUD versions. Other clients wouldn't support MXP in the first place, to the best of my knowledge. Therefore they won't respond to the MXP telnet negotiation and the MUD won't send the MXP tags.