I've been a huge fan of LOST for a long time, and have developed a grand unifying theory as to what's going on. Unfortunately, the season finale pretty much blew that whole theory out of the water. So I might as well share what could have been the answer.
Here's my theory. I read an Entertainment Weekly article that pitched the idea that the island is a psychological experiment designed to unleash psychic powers. That's based on two things - one is that one of the scientists the Orientation film listed as the inspiration for Dharma was Skinner, who was a psychologist who experimented on animals to condition them to behave in certain ways. Like training a mouse to step on a lever to get a food pellet. EW theorized that the island is a giant psychological experiment in fear - to condition the survivors into a perpetual state of terror. The other thing EW mentioned is that Dharma's research involves parapsychology - which is the "science" of psychic powers. So EW thinks that Dharma created the island and put the guy in the hatch to experiment on him, hoping to induce psychic powers. But I think EW was wrong because their final conclusion was that the "incident" mentioned in the orientation film was that the French Woman's son Alex was the original person in the hatch, who had a psychic break and became a powerful force controlling the island. I don't agree with that for a bunch of reasons, one of which is that they've already shown that the French Woman's daughter (not son) Alex is working for the Others. My theory is that Dharma originally wanted the guys in the hatch to develop psychic powers, but it didn't work. So they planned the plane crash to get more people on the island, hoping one of them would be the ones to get powers. That's why they're interested in kids (that can be raised and trained) and especially Walt (who already has powers). All the polar bears and the monster in the woods and the button and the Others living in the woods are all part of an environment designed to be scary, conditioning them. And the fact that Walt said "They're pretending" and Kate saw the fake beard confirms it for me. I think the reality is that the Others are living quite comfortably with regular clothes and regular food in another hatch, and every now and then they put on rags and fake beards and run around in the jungle to scare the survivors.
That's my theory. Can you find all the reasons why the season finale blew it to pieces?