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Here is my theory about babies and residual self image:

In the first movie Morpheus gives Neo the red pill and then leads him into the room where the crew members begin the process of acquiring Thomas Anderson's location within the power house/tower. The pill they give him was a program written so that they would be able to find him and thus free him from the matrix. When the crew is able to lock on to Neo's location in the power house they are then able to download his mind (which was previously in the matrix) to his body. They rejoined the mind and the body. The joining of the mind and the body causes someone to wake up in the real world. (Evidence for this is exemplified by the act of pulling the plug on someone while they are in the matrix. Pulling the plug on them causes them to die because the mind and body connection is severed.) When Neo wakes up we see that he lacks hair and skin tone and any other sort of identifying physical attributes. This is all background for my theory that a person in a pod is not really a person at all. It is just the platonic version of a body. When the mind is downloaded to the body then that body becomes the embodiment of the mind that is in the matrix. When two people have sex in the matrix and get pregnant that child's DNA is then used to create a residual self image of the child. If the child should ever grow up and awake in the real world, it would have to be a result of the unification of the mind and body. All that DNA is data. That data can be used to take a 'blank' body and turn it into whatever that DNA said the residual self image was. (Parallel to this from the movie the Sixth day. "Blank" bodies can be seen taking the form of a specific person via DNA data.)
You see, every body that is generating energy for the machines is almost the same. When two people create a human child in the matrix their DNA code is used to create another DNA code that takes on a new person. That new DNA code can then be assigned to any number of the platonic bodies that match the age or sex that the DNA code specifies. When the DNA code that represents the residual self image in the matrix meets up with a body that is jacked in this results in someone waking up. All that a sperm and egg really is is just data. DNA. The machines can use DNA to build the basic structure of a human without the need for actual sex to be taken place. It is very efficient, just like a machine would be.

Yeah but I still whack off manually.

Just a crazy thought. What if the humans in the pods, the humans plugged in to the Matrix aren't human at all? They can't be clones of real humans right? The machines would never have enough authentic DNA to account for all the so called clones in the fields.
So what if the DNA used to produce the human batteries isn't authentic DNA but code? Code made up by the machines themselves, duplicating human DNA. A random element can be introduced into the code so as to allow for unique or singular 'humans'.
Maybe the real human race went extinct long ago and the machines reintroduced us so to speak because it is their purpose to duplicate human cognitive mental states.
This would give a whole new dimension to: know thyself.

"We need them as much as they need us."

The machines need us, need 'humans' but not in order to survive, because as the Architect said: there are levels of survival they are prepared to accept.

So maybe they need us to fulfill their purpose, which is to imitate human cognitive mental states. This would explain the entire need for something as complex and seemingly superfluous as the matrix. I mean couldn't they get their energy from cows or something? Something less likely to start a rebellion than a human? I don't know...

@Annuit Coeptis What do you mean DNA must match sex and age? All they do is according to DNA build platonic body, don't they? They don't like have a farm of ready made platonic bodies there that just sit there and age?

@iRuleSoHard You don't use machines?