She was offended by your use of the term "Middle Eastern"?

Well that's ridiculous.

It's not exactly like you were calling him a (and excuse the ignorant term but it's used for the point) towel-head.

Now that would have been offensive to me. Not to mention ignorant, stupid and just plain mean. Middle Eastern, though? Gods, let's just get offended by calling people from the States Americans and people from the UK Brits.