1. I assume he can only make the artificial items, as you could see he couldn't change cloths either. The person in the hologram is there fro probably taken up in the program with what he is wearing.
2. Why he is hiding. There is no telling what the subconscious would do when you put a other person in it. To here its a dream like thing. Imagine if you where dreaming and couldn`t wake up and suddenly for ex i was in your dream. It would freak you out as if its your dream and aren`t thinking of me, wth am i doing there. This could upset here or startle here and so damage here nerves.