The Israeli Peace Now movement issued the following statement in response to Netanyahu's speech yesterday:
At the end of a week of speculation and mounting expectations, after Netanyahu's speech at Bar Ilan University, we can say loud and clear: the Emperor has no clothing.
Bibi is still Bibi, perhaps more sophisticated but without a real message for the State of Israel.
Without vision, without a course of action and without any willingness to lead Israel to the necessary decisions,
Netanyahu tried to remake himself, but even the pair of words "Palestinian state" is no magic formula that can
cover the political nakedness of Netanyahu and his government.
In Netanyahu's vision of an upgraded autonomy called a "demilitarized Palestinian state," the lives of the
Palestinians will be dictated solely by the whims of the government of Israel in Jerusalem.
Worrying elements of his speech:
• Netanyahu did not speak of the Palestinians as equal partners, neighbors whose fate is dependent on one another, partners in a long and complex process that requires trust-building, cooperation and a joint war on the extremists on both sides.
• Netanyahu chose to describe the Palestinians as of one cloth, in sweeping generalizations, using patronizing and arrogant language and referring in his speech to the Palestinians as if they were a primitive tribe subject to the graces of Israel.
• Not a word of self-criticism about Israel's mistakes over the years, not a word about the moral need to put an end to the occupation, not a word about the Palestinian's right to negotiate with Israel as equal partners in a real process.
• Freedom of movement and a normal life are a prize the government is willing to give the Palestinians in exchange for their loyal behavior towards Israel.
• The government of Israel would have complete freedom to act, to build, to establish facts on the ground and to expand construction in the settlements
Such an arrogant and aggravating attitude by one side, that wishes to dictate terms to the other side, will never lead to a real agreement of peace and reconciliation between peoples.
To the contrary, a militant and patronizing attitude will make the moderate government on the Palestinian side reject the crumbs Israel is willing to throw it, and instead of negotiations the PA will prefer joining the extreme element that still support violent resistance against the occupation. If Netanyahu continues speaking and acting as he did at Bar Ilan, the third intifada will come fast.
The Prime Minister's office was quick to characterize the speech as representing the broad Israeli consensus among the nation today, this is clearly untrue and Peace Now will continue its work to expose the real Netanyahu govt and push for a real peace to end the conflict.
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8/23 
The fallacy of your position is highlighted in the following which you wrote above:
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Netanyahu did not speak of the Palestinians as equal partners, neighbors whose fate is dependent on one another, partners in a long and complex process that requires trust-building, cooperation and a joint war on the extremists on both sides.
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The problem is that the same can be said about the Palestinian attitude towards Israel. They do not view the Jews here as "equal partners". They view the state of Israel as illegitimate. They view it as a criminal state. Their struggle against is NOT in order to achieve "self-determination"...they have been offered that on repeated occassions and have rejected it each time. Their goal is a long term war-of-attrition in which Israel will be eradicated in the end. The "peace process" is part of this struggle, as Arafat and other Palestinians leader constantly tell their people. In fact, the term "peace process" is a good example of Orwellian "Newspeak" where something is called the opposite of what it is. In reality it is the "Jihad process". Israeli political concessions (as opposed to economic agreements) merely whet their appetite for more concessions, as the Oslo Agreement and the Israeli flight from the Gaza Strip proved to them...they believe that if they keep up the pressure, Israel will eventually flee from Tel Aviv, just as they did from Gush Katif.
Netanyahu knows, and I believe Obama knows that it is not possible to reach a contractual peace between Israel and the Palestinians. However, the US needs to maintain good relations with the Arab states hostile to Israel, but they also need American support against external enemies like Iran. Thus, Netanyhau has to maintain a delicate balance of keeping Israeli vital interests protected (one of them is developing the settlements in Judea/Samaria which show to the Arabs that Israel is serious, Israel is here to stay and Israel will not run away again in the future as it has in the past) and playing the game of the "peace process" to keep the Americans and EU happy. I think Netanyahu showed the right balance in his speech and I can only hope that he will continue to perform the balancing act with success.
I agree with Peace Now that Israel must "speak of the Palestinians as equal partners". I agree with YBD that some (if not most) Palestinians do not think of Israelis as equal partners, but this is still no excuse. Peace will not come from trying to reach the lowest common denominator. It will come from strong moral leadership.
Sorry, but Netanyahu has a solid national consensus behind him:
http://www.haaretz.com/hasen/spages/1093234.html
If there is a future with two states, the question is: Will the Palestinian State be militarized or demilitarized.
Certainly Peace Now can understand after the rocket attacks following the Israeli withdrawal from Gaza why Israel is insisting that the Palestinian State not have the ability to attack Israel.
Is this so unreasonable?
More on Netanyahu's ideas and why he is showing that the Palestinians were never fighting for "self-determination" and a Palestinian state:
http://www.haaretz.com/hasen/spages/1093877.html
http://www.haaretz.com/hasen/spages/1093875.html
Netanyahu's speech and the Palestinian reaction to it demonstrate why the two sides are incapable of making peace without strong outside mediation. So Obama will have to force the two sides to make concessions and recognize what the other side has presented.
“I will bring back my exiled people Israel; they will rebuild the ruined cities and live in them. They will plant vineyards and drink their wine; they will make gardens and eat their fruit. I will plant Israel in their own land, never again to be uprooted from the land I have given them,” says the LORD your God. (Amos 9:14-15)
. Zechariah 12:2-3 says, “I am going to make Jerusalem a cup that sends all the surrounding peoples reeling. Judah will be besieged as well as Jerusalem. On that day, when all the nations of the earth are gathered against her, I will make Jerusalem an immovable rock for all the nations. All who try to move it will injure themselves.”