If you read the entire argument the Pope presented, the 14th century sentence he quoted was a premise to be argued with, not accepted at face value. It was posited to elicit counterarguments. The Pope even quoted the pre-jihad Mohammed, who was much more prone to tolerance of other religions (because he was in a position of weakness) to give Muslims a hint at how they might challenge it.
He did not cave in or give ground. He basically said that Islam has internal inconsistencies on the subject of using violence to spread its religion. He did not say how he personally has sifted these inconsistencies.
I encourage everyone to read his original speech. It is linked on this site someplace.
You nailed it like a Jewish carpenter :)