It's the decision making over what will constitute the Palestintian state once its formally established. The questions are;
1) Right of return. Do the Palestinians forced out over the years get to return to Israel? (Answer is no, but there will be compensation and more flexible movement across the border)
2) Jerusalem. Israel claims Jerusalem as their full and undivided capital. The Palestinians want east Jerusalem as their capital. (This ones tricky, one side will have to concede - perhaps in return for a more favourable view on the Settlement question)
3) The Israeli settlements. Israel has (illegally) built settlements in the occupied West Bank. It doesn't want to remove them. (Will most likely be solved by exchanging the land for other current Israeli land)
4) Palestinian security. Palestine wants full sovereignity, Israel really would rather control its airspace and in many ways essentially still occupy it. (Will most likely end up in a comprimise).
Of course Hamas isn't involved so the talks are crippled by that.
