Hello all, I'm pretty sure I have the most convincing theory to date. It doesn't explain (yet) everything, but it does offer a general idea of "where they are".
It goes like this:
The island is the Garden of Eden. Paradise. Straight out of the bible. The place where man is tempted by good and evil, where freewill and destiny are put to the test.
The MonsterWhen Danielle Rousseau is asked about the monster she says that it's not a monster, it's a security device to keep things out (Ep: 1x23, Exodus Part 1).
The black smoke is that security device. Pick up the bible, read Genesis 3. After Adam and Eve eat the fruit of the tree of the knowledge of good and evil, God kicks them out of the garden. To prevent them from eating of the tree of life, God places a cherubim as a guardian to the tree. It's said to hold a flashing sword that guards every which way into the garden.
Think back to the episode with Eko when he encounters the black smoke (Ep: 2x10, The 23rd Psalm). It comes out to him, long and cylinder like (sword like?). It is dark and flashes. If you pause carefully as the camera moves through the smoke, you'll see still images that are of Eko's past life, as though he were standing at the judgement seat (of God). After seeing the black smoke what does he do? He builds a temple to the Lord (sort of like what the children of Israel did after they witnessed the awesome power of God on the mountain in the wilderness).
God is frequently manifested in the old testament as appearing as a cherubim, as black smoke, as flashes of lightening (see the story of Moses and Elijah's encounters with God on the mountain and the appearance of God to the children of Israel in the wilderness).
Black and WhiteIn the caves, they find two skeletons, one male and one female (Ep: 1x6, House of the Rising Sun). They jokingly dub them Adam and Eve.
In one of the skeleton's pocket there is a black stone and a white stone. Locke tells Walt about backgammon (the oldest game in history). He says that backgammon is a classic battle between good and evil. The Garden of Eden is the birthplace of good and evil.
Eden as an IslandIn season 2, Locke is in the hatch working a crossword puzzle (Ep: 2x8, Collision). The camera focuses in on two words: Gilgamesh and Enkidu. Gilgamesh is an ancient hero (Mesopotamia) who survives a great flood (likely Bible's equivalent of Noah) and who afterwards calls on his God, Enkidu, for help finding eternal life. The ancients knew that eternal life used to reside in the Garden of Eden (it contained the tree of life). And during his search he locates it on an island -- read David Rohl's theories on Eden. The famed author/archeologist places Eden as likely the island of Bahrain. Now I'm not saying they're in Bahrain, just that at some point, Eden was thought to be on an island. That's the significant part. Eden was probably located somewhere in Armenia, but there was a post-flood change in thinking and somehow the idea of it as an island entered popular thought.
In episode 2x17, Lockdown, Locke sees a map on the blast door. The bunkers are strewn around the center of the island. The center is marked by a big question mark. Is this not the center of the garden which the black smoke, i.e. the cherubim, is keeping people away from?
Four Toed StatueSayid, Sun, and Jin see a giant statue of a foot with four toes (Ep: 2x23, Live Together, Die Alone). In Genesis chapter 4 there's a reference to giants (Nephellim) living on the earth. Personally I don't believe the bible means literal giants, rather men of great renown, but popular culture/thinking has turned giants into the literal translation. Assume that this is how the Lost creators chose to translate the Genesis 4 passage.
Social ExperimentThe Garden of Eden was the first social experiment. God placed temptation, good and evil, in the garden. From that point on, mankind has been in a struggle with themselves and others. People argue that since God knew that by putting the tree of temptation (good and evil) there, it wasn't freewill. In other words, destiny. Others say that it doesn't matter that God knew, man still had a choice.
The garden has never been found. It is lost. Eternal life is still sought by mankind.
My theory doesn't fit everything yet into place. I'm still not sure who the Others are, whether they're remnants of the Dharma project or not. Maybe they're God's guardians, using the hatches/island as a test to put the people of Flight 815 through. Perhaps one has to be purified, or face their sins before they can come to live in peace with the island (like the others have?). That would answer the questions of why it seems like the Others test the people of Flight 815, why the hatches seems more like social experiments (push the button), and why Ben talks about those of 815 being "good" or not, and why the children were removed (since popular culture generally assumes that children are morally innocent).
Comment on Matt's theory in the Garden of Eden Theory Comments.