The Matrix is all about the conflation of physical reality and virtual reality, but we often forget about a sort of intermediary existence… that of the machines.
Their consciousness appears to be singular, a hive mind-type system (you'll get a better picture of this in the third movie) and while they obviously have a physical reality, their use of software can be compared to the simulations of the Matrix.
We should probably start by mentioning that a lot of the machines look a lot like insects or squids. Their biological appearance reinforces the fact that they are indeed very alive. They operate through a series of electrical signals just like the human brain, so the only difference is that they're not carbon based life forms.
The bug that is put inside Neo by the agents is a symbol of the combining of different types of existence. At first it appears to be a type of metal device the agents will insert. But suddenly it becomes a living bug, squirming its way inside Neo through his belly button.
When Trinity goes to extract it, we see it through her removal contraption as a living organism crawling around inside Neo. And when Trinity zaps it and sucks it out of him, we see its blood splatter in the tube. But when she deposits it in the street, suddenly it is just the device we originally saw it as.
Maybe it's a figment of Neo's imagination, or maybe it's just a trick of the Matrix. Either way, it's a symbol for the duality of kinds of life that exist in the Matrix. It forces us to think outside of the realm of modern day possibilities. Machines are just as much alive as insects—or maybe even more alive, given the implied depth of their consciousness based on the construction of the Matrix.