This is me speaking for them but it seems to me that they mean to say that the point where they draw the line is where you take a contract/business from the military. In other words, if they are paying you that is over the line. Working on missile guidance for NASA? That's okay. Working on a text processor for the military? That's not okay.

This seems like a reasonable way to draw a line. Obviously things get questionable as they might work for a company that has a contract with a company that has a military contract. How can they be sure that their work won't be used as a part of that contract?

But as a start I think this framework isn't so bad. Probably better than something I would be able to come up with on the spot