I'm not an expert in the interpretation of hadith, so I can neither verify that that is an accurate translation, nor can I comment on its significance in deriving a religious rule.
However, I CAN say without a shadow of a doubt that all of the passages that talk about the killing of non-Muslims are in the context of warfare, where there are very strict rules in place. The hard religious principles that apply to this sort of thing include things like:
1) One may not attack a person who is a civilian. There is no such thing as "acceptable collateral damage".
2) One may not attack a person who does not pose a threat, or who is not an active participant in war. So there's no justification for, say, bombing the cafeteria at the civilian head office of a military contractor that makes bombs, or any other civilian target.
3) One may not kill a person merely because of their belief. The principle that there is no compulsion in religion is a hard principle with no exceptions.
4) One may not deliberately kill oneself in battle, or deliberately sacrifice oneself by one's own hand. So suicide bombing and/or harakiri is out.
Whatever the sound bites that get paraded may indicate, these principles are hard principles that any Muslim you ask will know about. Feel free to print them out as-is, just as I've stated them here, and take them to your nearest mosque and ask the people you find there if they agree with them all. I'd be surprised if you find a single person who says "well, I think we could be flexible on one or more of those".
If you're really interested, I can ask my local scholars about the background and context for this particular reference and get back to you. These recounted sayings obviously took place in the context of conversations, and the rest of the conversation's context and lead up are as important as the quoted phrase itself. Feel free to email me, my address is Nazeer Gassiep at gma il dott com, and I'll get back to you with a full explanation of that in a day or two. Alternatively, visit your nearest mosque and ask the Imam there. Or do both, and compare the answers.