Ok, a couple things to augment the discussion:
Humans: The Machines were designed with a purpose: to serve man. Even though they rebelled, even though they enslaved man, that purpose still exists. If every human was destroyed, the machines would essentially have no reason to go on. This is what the architect is referring to when he says "we're prepared for a lower level of existence" (paraphrased) ... the machines wouldn't commit suicide, but what could they really do outside of "exist"?
Smith/Oracle: The Oracle says she can't see past a decision she doesn't understand; therefore, she is incapable of seeing what will happen after she allows Smith to absorb her into Meta-Smith.
However, once she has been absorbed into Smith, she is no longer restricted: she can see the rest of the movie. She sees that Neo will sacrifice himself to Smith and end the war. That's why Smith laughs -- and why the other Smiths are
confused. The knowledge that Neo "wins" is not available to the Meta-Smith; all they see is his defeat.
Neo and the Sentinels: The Matrix is tied into the power system of the machines (because the humans inside of it are combined with a source of fusion blah blah blah). Neo can control/change the Matrix. Therefore, he can control the source of the machines' power. However, his control is not absolute (hence going above the clouds), and it's a great tax of his will.
The End (Smith/Neo): When Neo destroys Smith at the end of the first movie, he is actually splitting himself into two: Neo and Smith. As long as the two are separate, Neo can't fulfill the prophecy--he can't reach the source by himself. When Neo sacrifices himself to Smith at the end, Neo/Smith is now in contact with the source, and the prophecy is fulfilled.
Now, to go deeper, we need to go to Mobil station at the beginning of the third film. If you are versed in Hindu mythology, the Mobil station scene actually tells you what's going to happen. Rama-Chandra (the 7th incarnation) stands in front of Neo (the 6th incarnation -- remember what the architect says about their being 5 predecessors) with his daughter (Sati) between them. Sati means "sacrifice". Therefore, for Neo to become Rama-Chandra, he must sacrifice himself. Interestingly enough, in the mythology, the 6th incarnation does meet the 7th. When Morpheus is talking to Link, Link asks if they have Neo. Morpheus says "Don't you see him?" and Link responds "I saw something, but I didn't know what it was". This is Neo already transformed into the 7th incarnation, yet still not realized until he sacrifices himself.
Any other questions? I've got answers to most of them
