The revealed threat is the Exile. Zez doesn't say that, makes you think he's referring to the Sith. Another proud Jedi doing what proud Jedi do - lie. An easy slow fall....
As for him saying he is no Jedi, that is ludicrous. He teaches you a Jedi form if you let him live, and if you fight him he defends himself with a lightsaber and the Force.
As for how to role-play it "correctly" - is there really a correct way to role-play
Go with what you feel you would do in that role.
I have played through the game dozens of times, and spent countless hours studying and working on TSL game files. I almost always play as an LS, so he lives. But I have played DS, and I enjoyed cooking his butt. Not nearly as much as bashing Vrook - the most laughable "light side" Jedi I ever saw. If he isn't outright DS, I don't know who is. I would invite Dooku to dinner any night over Vrook Lamar.