Transcript here. An excerpt (emphasis mine):

Q I want to ask you about the broader Muslim world, but let me — one final thing about the Palestinian-Israeli theater. There are many Palestinians and Israelis who are very frustrated now with the current conditions and they are losing hope, they are disillusioned, and they believe that time is running out on the two-state solution because — mainly because of the settlement activities in Palestinian-occupied territories. Will it still be possible to see a Palestinian state — and you know the contours of it — within the first Obama administration?
THE PRESIDENT: I think it is possible for us to see a Palestinian state — I’m not going to put a time frame on it — that is contiguous, that allows freedom of movement for its people, that allows for trade with other countries, that allows the creation of businesses and commerce so that people have a better life.
And, look, I think anybody who has studied the region recognizes that the situation for the ordinary Palestinian in many cases has not improved. And the bottom line in all these talks and all these conversations is, is a child in the Palestinian Territories going to be better off? Do they have a future for themselves? And is the child in Israel going to feel confident about his or her safety and security? And if we can keep our focus on making their lives better and look forward, and not simply think about all the conflicts and tragedies of the past, then I think that we have an opportunity to make real progress.
But it is not going to be easy, and that’s why we’ve got George Mitchell going there. This is somebody with extraordinary patience as well as extraordinary skill, and that’s what’s going to be necessary.

Yes, just the settlements. Hamas missiles and suicide bombings have nothing to do with Israelis losing hope for a two-state solution.