I think the electromagnetism was a side-effect of the island's "energy/light". Since the island is kind of the source of all goodness/souls, it seems fair enough to expect some weird energy stuff to go on.
The light was the source of all "light" which "burns inside all men". I guess it's kind of the source of all souls or something. Regardless, it's a mystical doohickey.
Also, bear in mind that the light-pool seems to be 1) The source of this soul/light stuff 2) A plug to keep the resultant electromagnetic energy in place and 3) The mouth of hell (when Desmond unplugs it).
I assume the Man in Black's soul was turned into the smoke monster because it was evil and tainted. Remember, his body was found and entombed which means the smoke monster must not be related to his physical form, but must be related to his non-corporeal aspect, ie. his soul. Jack did not have an evil soul (and had in fact undergone a Christ-like sacrifice) which would explain why he didn't get the same treatment.
Dharma were just interested in the island's strange properties. The electromagnetism, the healing properties of the place etc. Since it was a remote location, I guess it was also great for those psychological experiments.
Desmond survived because he is immune to the electromagnetic forces that would normally kill people. I assume this was as a result of him turning the key to detonate the hatch at the end of season 2. Not quite sure how, though.
The island teleporting was actually invented by the Man in Black (notice the wooden wheel in his flashback episode), and seems originally to have been a way for him to escape the island. (Remember, when the island teleports, the wheel-turner gets teleported somewhere else - ie. away from the island). I assume this is done through some kind of magical harnessing of the island's electro-magical-light powers. We already know that the island is constantly moving anyway (Eloise Hawking's crazy chalk-pendulum-room episode) so it's not a huge step to say it can move somewhere at will.
With time travel - well, I guess if the island can teleport in space then it can get messed up in time as well.
As for Walt, and the Numbers - I don't really know. I suspect that, since each number corresponded to a Candidate, the fact that the numbers kept reoccuring was a way for Jacob to hint to the candidates that the numbers were important, so that when they found out what they meant, they realised that this meant *they* (the Candidates) were important. I'm not totally convinced by this theory, though.
Also, I suspect the island is a sort of reinterpretation of Eden. It's guarded by a "flaming sword that turns every way" (ie. the electro-forcefield thing that means you can't get in or out unless you follow a specific bearing), there's some weird birth-stuff going on there (perhaps a result of the childbirth-curse that God puts on people in Genesis) and an Original Sin takes place (killing MiB) which is a combination of the Fall of Man (lets evil into the world in the form of the smoke monster) and Cain and Abel (brother kills brother). I'm not saying this for religious reasons (I'm actually an atheist) but a lot of parallels can be drawn between the two stories.
Secretary of Unknowable Knowledge for the Rock/Dink administration '08
