Dispensational view of Israel and the Church- is this right?

I often find a lot of people seem to hold somewhat to the dispensational view, and there is something that appears to me somewhat confused about the nature of Israel and the church. I am sure (and Romans makes this quite clear, from memory) that Israel as a nation and as a specific entity is not rejected by God, or that the notion of such a nation and people is finished with, but considering that the early church was made up initially of Israelites, is it not better to think that there should in fact be a differentiation between Israel and the Gentiles, not Israel and the Church?

Also, thoughts on covenant theology would be good.

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