Undergraduate supervisor asked me to join his group for grad school. How do I politely say I'm also considering other options? I spent one summer working in a research lab during my undergraduate degree. Now that I am in 4th-year and applying to graduate schools, my former supervisor has asked if I would like to join his group.

I had an enjoyable experience in his group, but I think my talents lie towards the theoretical side of my field (physics). To be perfectly honest, I think that it is more likely I will choose something other than his group. At the same time, I don't want to "rule out" the possibility of working with him just yet because I can see myself being happy with either scenario (his group or somewhere else).

So my questions are:

How do I politely tell him that I am interested, but I want to consider other options too? How transparent should I be with my interest in theoretical research over experiment? Would it be best if he knew that his group would probably not be my first choice?
Just explain to him what you have said here (in greater detail, of course).  If you are applying to graduate school, you are really going to want a strong recommendation from this professor.  You can't get that without giving a clear statement of what you are planning to do.  The professor should not be offended; faculty members  deal with these kinds of situations regularly.