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We (Neo) are informed by Morpheus that if you die in the Matrix, you die in the real world. "The body cannot live without the mind."

When Smith absorbed/overwrote every living thing on Earth in his quest for power, he in effect killed everyone in the Matrix. Shouldn't everyone who was plugged into the Matrix have then died in the real world?

Cypher proved this concept to be true when he killed his shipmates in the real world by simply unplugging them from the Matrix (separating their consciousness from their body).

Is this a plot flaw or am I missing something?

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Sounds like they're not really "overwritten", just "swapped out". – Nate Eldredge Feb 11 at 18:06
up vote 36 down vote accepted

No, he didn't kill everyone in the Matrix.

First of all, when Smith takes over an individual in the Matrix, this is probably more akin to when agents temporarily inhabit people. We have seen instances where agents inhabit a Matrix avatar and then leave it, and the character returns to "normal" afterwards (although the helicopter pilot is dead for other reasons — namely Trinity's bullet):

For stronger evidence, there is a scene that I recall in The Animatrix ("Detective Story") where Trinity is followed onto a train by a private eye who has been inhabited by an agent. She shoots the detective in the arm and escapes. Immediately afterwards, the agent leaves the detective and the detective is seen to be completely normal again.

As for programs inhabited / co-opted by Smith, recall that the Oracle is "normal" at the end of Revolutions — further evidence for his actions being temporary rather than "overwriting" anything:

Note in this conversation that the Architect promises to the Oracle that humans in the Matrix who want out "will be freed" — confirming that they are still alive.

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3  
"the detective is seen to be completely normal again": the takeover had not been completed when Trinity shot him. Do we ever see a human returned to normal, alive and well after a full transformation? – isanae Feb 10 at 18:20
    
We also see Neo's body on the ground of the crater where they landed after his, err, anti-virus code runs and cleanses the Smith virus. – Ellesedil Feb 10 at 19:22
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@isanae Not directly, no, because most agent hosts on screen suffer from cases of being fatally shot. The closest you get is the helicopter pilot in the 1st, whose corpse reverts to normal as soon as the agent leaves it. With that, and as the answers detail, the movies are pretty clear that agents don't overwrite their hosts, just override them. – Radhil Feb 10 at 19:23
    
@Radhil The fact that we never see a host being alive after a transformation makes me question that. Agents might not overwrite bodies, but they may scramble minds. So without intervention from an sysop who could restore a backup (such as Deus Ex Machina), these people could actually be considered dead. – isanae Feb 10 at 19:28
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You missed a chance to write "defective detective"... – Zommuter Feb 11 at 15:21

No

Smith assimilated every human in the Matrix, but that does not result in death for the assimilated human.

Smith's ability to assimilate people in the Matrix is derived from an Agent's ability to do so, except that Agents are limited to assimilating one individual at a time, whereas Smith can copy himself and in doing so assimilate multiple individuals simultaneously. Agents' assimilation ability restores the possessed individual if the Agent leaves that individual. Usually an Agent leaves the possessed body because the body has sustained a fatal injury (in which case the possessed individual obviously dies), but in some cases we see that the Agent leaves an uninjured body and the possessed individual is restored unharmed (albeit with some memory loss). For example, the comic "Wrong Number" demonstrates this:

Wrong Number

It stands to reason that humans assimilated by Smith are similarly restored unharmed except for memory loss.

Furthermore, we see several programs which were assimilated by Smith but which were restored to their original form after he was defeated (e.g. the Oracle and Sati). Most conclusively, the fact that the humans in the Matrix are alive after Smith's defeat is made explicit in the final conversation between the Oracle and the Architect:

The Architect: Just how long do you think this peace is going to last?

The Oracle: As long as it can. What about the others?

The Architect: What others?

The Oracle: The ones that want out.

The Architect: Obviously they will be freed.

The Oracle: I have your word?

The Architect: What do you think I am? Human?


Note: the original version of the question asked if Smith killed everyone on Earth, not just in the Matrix. I've included the remainder of my original answer to that version for completeness.

Smith did not kill everyone on Earth. There were many humans still alive in Zion after Smith was defeated. In fact, it was because Smith was defeated that the Sentinel army was called off and ended its attack on Zion: Neo made a deal with Deus Ex Machina in which the Machines would end their attack on Zion if Neo defeated Smith:

Neo: The program Smith has grown beyond your control. Soon he will spread through this city, as he spread through the matrix. You cannot stop him. But I can.

Deus Ex Machina: We don't need you! We can stop him!

Neo: If that's true, then I've made a mistake, and you should kill me now.

Deus Ex Machina: What do you want?

Neo: Peace.

The humans in Zion weren't plugged into the Matrix and hence were safe from Smith.

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I think we have equally nice answers. +1 :-) – Praxis Feb 10 at 17:02
    
@Praxis Right back at ya. :) – Null Feb 10 at 17:02
    
They're OK as far as answers go... 😀 – Morgan Feb 10 at 20:59
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@Morgan What is that supposed to mean? – Null Feb 10 at 21:05
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@Null Sorry if that came off as too flip. It was suppose to be a complement to both answers. – Morgan Feb 11 at 0:54

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