Clu's interpretation of a "pefect system" was to rid the system of its imperfections. He viewed ISO's as being imperfect and had them eradicated and lesser programs either sent to the games to be derezzed or rectified to be repurposed in his "Initiative."

The problem is that the definition of Perfection depends what is current knowledge, thus the "sudden" appearance of the ISO's became a wrench thown in whatever Flynn's original plan was.

Clu, being a rather literal entity, took it rather badly, and tolerating their existence flew in the face of his vision for a Perfect System.

The one thing to understand here is that even though the characters as presented as humans in a story written to be enjoyed from a human perspective, strictly speaking not even the Flynn's are actually "human" in the terms that we understand once they are inside the Grid. By being digitized their bodies are disintegrated atom by atom and the only thing that remains is a digital map that for story purposes also retains individual conciousness.

They would not actually be subject to the basic human biological needs and imperatives, but it stands to reason that in order to retain some level of sanity their minds would probably adjust their perceptions in a way that allowed them to function.

My guess is that everything the users experience while they remain digitized is some sort of consensual hallucination, not unlike the way Cyberspace is described in the works of W. Gibson or N. Stephenson