What happens in the real world when two people have a baby in The Matrix? Where do babies come from? Are they humans or AIs? If they're humans how were they conceived? Hasn't this question come up in the trilogy? Or in the interviews... I just watched the first one once again and they didn't answer this, don't remember the 2nd and the 3rd parts that well.
The Matrix, as Morpheus explains, is styled on the 'boom' of humanity: late 20th century earth. Everything about 'normal' life is replicated within the simulation, so yes the occupants of the Matrix will have sex, get pregnant and eventually give birth: believing the baby to be of their genetic creation.
However, in the 'Desert of the Real', babies are not born: they are grown...
Within the matrix, consciousness is transplanted from consciousness into the simulation: the same is true of newborns. The 'Birthing' within the Matrix is a program which recreates the conditions of childbirth, and then as the baby is 'born', he is plugged into the Matrix and its consciousness is transferred.
Babies are grown by the machines. The assumption is that the machines have done enough analysis and study of the human physiology to understand what is required for childbirth.
The machines use this information to simulate the womb environment artificially and grow the babies in that. Through genetic matching/mapping they probably select the Ovum and Sperm required for this process and introduce the fertilized egg in the artificial environment. The baby grows in the environment and when the time is right, it is plugged into the matrix.
Most of this is visually shown in the movie.
We know (from the Matrix Webcomic "Deja Vu" that bluepills (those inside the Matrix) can become pregnant and have children.
And we know from the "desert of the real" speech by Morpheus that in the real world, babies are created by the machines using IVF techniques and artificial wombs. You may wish to note that the embryo is already plugged into the Matrix.
It's therefore no leap of the imagination to learn that as the babies grow, they're assigned to "parents" who think they're having a normal pregnancy.
When the baby is born, it then enjoys an independent existence, growing within the shell that was implanted into the "pregnant" mother.
All things that happen in the matrix are all just an illusion, a trick to the mind to all those human sleeping in a pod to become battery for the machine. Even if they do sex in the dream world, well there are all just a dream.
There is no routing of sperm to other female haha. All babies are created using IVF - in vitro fertilisation. There is no traditional baby making where sperm swimming to the egg :D.
You can ask another similar question like, if people eat in the matrix, what they actually eat in the pod or if they wear a dress in the matrix what they will wear in the pod. The answer is none. All activity in the matrix is just a dream simulation created by the machine. No correlation at all to the real world.
All human who died in the pod will be crushed to become liquid and become a food source to other human in the pod. That is all they eat and sleep/dream is all they do.