A Demilitarized Palestinian State As Part of a Two State Solution?

Is anyone as flabbergasted as I am by Sunday's speech by Israeli Prime Minister Benjamin Netanyahu? According to articles on CNN and Yahoo, Netanyahu said that Israel could accept a peace agreement with a "demilitarized Palestinian state" as its neighbor.

Netanyahu's conditions are as follows: Unequivocal Palestinian recognition of Israel as the Jewish national state with Jerusalem as its capital, and full demilitarization for a Palestinian state -- no army, no rockets or missiles, no control of airspace.

So, a castrated state with conditions dicated by a major power armed to the teeth with American weapons.

Sounds like Netanyahu not the least bit interested in a Palestinian state, nor in Middle East peace.