I’m going to have to go ahead and disagree with the whole “nested Matrix” theory. I think it seems to obvious and, while this is just my opinion, too much of a cop-out.
Obviously, the main evidence for the nested Matrix theory is that Neo stopped the sentinals, right? As Smith explained in the beginning, Neo is somehow merged with the Matrix. Maybe he can affect it even if he isn’t plugged in. That is, in the real world, he can control things like sentinels, because they are controlled by the Matrix. This doesn’t mean he has all manner of super-powers (flying, etc) like in the Matrix world, however.
I think the Architect is the original AI that they talked about in the first movie. “He” was the original machine to achieve consciousness, and eventually wrote the program to enslave humans. However, for some reason there is an error in the program that inevitably results in the One coming into existence. Six times now, this has happened. What I’m unclear on is exactly what the choice was that Neo made: did he crash the matrix? (I seem to remember that Architect saying he could either repopulate Zion with ~20 people, or kill every person plugged into the Matrix when he saved Trinity, because that would cause the Matrix to crash.)
I think Smith is a rogue program now, and when he answered the phone he somehow took over the body of the guy he “stabbed” in the chest. Thus, Smith has made the leap into “reality” (or the Zion Matrix, as it were).
Also, is the French guy a program or a programmer? Is he a human plugged into the matrix somewhere who knows about it and can write his own programs, or more of a rogue program similar to Smith?
Personally, I don’t know that all of these questions have answers, and the movie is just kind of a jumbled mess. I’d be mighty impressed if they tied all these loose ends together in Revolutions.
Oh yeah, and I agree with Munch that the Architect’s speech was needlessly confusing and verbose. Maybe their way of covering up the fact that, deep down, this movie just doesn’t make any friggin sense!