I just think it's the second time you meet him in the game. He showed up in another location in the TGS trailer.Trailer implies in some way that he knows cloud. My big brain theory:
He says "you know what i want, a second dance, just the two of us". that is this games, Zack. He really didnt die or his story is now different to the point where he is brain washed or too much mako just made him a shinra soldier, and nothing more to a point
...Is that a gun? Or a grappling hook?