I think Zion was in the real world... my husband speculates that Neo has the ability to "see" machine energy emissions, through the hardware in his head...

PJ

"You told me you weren't like other men," she said, shaking her head at him when the storm of laughter had passed.
He grinned at her - a goofy, Clark Kent kind of a grin. "I have a gift for understatement."
"You can say that again," she told him.
"I have a...."
"Oh, shut up."

--Stardust, Caroline K