^^^
From Chapter 2:
"I am not afraid. None of this is real." (The Outlander)
"Illusions can kill." (Valkorion)
--
"I am not afraid of them. It's just a bad dream." (The Outlander)
"But the carbonite poisoning is quite real." (Valkorion)
I have not come across the dialogue you mentioned.
Moreover, Valkorion was flow-walking for the Outlander as well (showing him different places and events occurring in different parts of the galaxy) so this may explain "these are not illusions" part.