Israel is the extremist with it's occupation of the west bank.
While I'm not quite sure I agree with this, I do wish we could have a president who would take a more even hand in Middle Eastern relations, rather then being so warm to Israel(Which has its own drawbacks) as we are now. This is one of the few areas I feel more comfortable with Obama then McCain, and I therefore hope this speech was just a sly political move. Hopefully we can get a leader in there who one day is not so hair-trigger for one side or the other.
The sense I got from watching all of those Israel's 60th Anniversary fora on C-SPAN is that the current state of negotiations is that Israel is prepared to cede the non-Old City parts of Jerusalem, while the Old City is still an open question. The current negotiators are working with the goal of getting something in writing to another Annapolis style conference so that the successor Israeli government can hold it as fait accompli and therefore inviolate in their pandering to jingoist voters. This agreement will be presented (and honored by the US government) regardless of who is elected president.