Concerning differentials per se, the answer of xyz should clarify your question. Furthermore, the answer of user10676 settles the question concerning the line element. For those who do not know much about Riemannian geometry lets elaborate a bit on user10676's answer:
Think a moment about lines. A possible way to view a (straight) line segment $l$ from $x$ to $y$ in euclidean space is that $l$ realiyes the shortest curve from $x$ to $y$. Hence, we can think of line segments in $\mathbb{R}^3$ as shortest connections between two points. From an abstract point of view: The Euclidean space $\mathbb{R}^3$ is a metric space with respect to the usual euclidean metric (where the $x_i, y_i$ are the components of your vector)
$$d(x,y)= \sqrt{\sum_{i=1}^3 (x_i-y_i)^2}$$
(this is just the abstract formula for your pythagoras theorem). This metric is induced by the euclidean scalar product $\langle x,y\rangle = \sum_{i=1}^3 x_iy_i$ via $d(x,y) = \sqrt{\langle x-y,x-y\rangle}$. Now the derivative $\frac{d}{dt}|_{t=s} c(t)$ of a (differentiable) curve $c\colon \mathbb{R} \rightarrow \mathbb{R}^3$ yields a vector in $\mathbb{R}^3$ at each point $s$. We can measure its length using the euclidean metric. For your straight line from $x$ to $y$ the derivative is $y-x$ (and its length is the euclidean distance). As you learn in a calculus course for differentiable curves the length is computed exactly as described in the post of user10676. In our case for the line from $x$ to $y$ given by $c(t)=x+t(y-x)$: $$\ell(c) = \int_0^1 \sqrt{\langle y-x,y-x\rangle}= (1-0)\sqrt{\sum_{i=1}^3 (x_i-y_i)^2}=d(x,y)$$
Notice that we can identify the middle term in the above equation with a sum of the $(dx_i)^2$ in user10676's answer. However, we used a lot of the structure on $\mathbb{R}^3$. In an essential way the construction depends on $\mathbb{R}^3$ being a (finite dimensional) vector space. This was used in the following way:
We computed the derivative (which then turned out to be at each point a vector in the same vector space). Then we measured the length of the derivative with the euclidean scalar product.
Obviously the sphere is not a vector space, so we can not copy exactly what was going on in $\mathbb{R}^3$. What should be our geometric intuition for a line segment? It should be a straigh line, i.e. the shortest connection between two points $x$ and $y$ on the sphere. To measure length of (differentiable) curves we would like to copy the trick in the vector space: Compute the derivatives and measure their length.
The answer to the first problem is to put a natural differentiable structure on the sphere. In fancy words: The sphere $\mathbb{S}^2$ in $\mathbb{R}^3$ is a smooth manifold modeled on $\mathbb{R}^2$. For curves into such objects one can compute derivatives. In our example: The derivative of a curve $c\colon \mathbb{R} \rightarrow \mathbb{S}^2$ at $s \in \mathbb{R}$ is an element in the tangent space at $c(s)$. Geometrically this is a vector in the tangent plane of $\mathbb{S}^2$ at the point $c(s)$. Now we have derivatives and want to compute their length. Thus we hit the second problem: How do we compute the length?
Answer: Riemannian geometry. Simply speaking measuring length in the tangent planes should be related to the smooth structure on the sphere, the way we measure the length shoudl depend smoothly on the basepoint of the tangent space. The correct way to do this is using a Riemannian metric (and the formula you get out is exactly the one provided by user10676). I will not go into details since this problem is more involved and there are very good books on Riemannian geometry explaining it. If you are interested in the metric aspects (without to much Riemannian geometry) I recommend:
M.R. Bridson and A. Haefliger: Metric Spaces of Non-Positive Curvature
The first chapters derive exactly the formulas for line segments and put it in a very nice perspective.