The fact that they live side by side with Many arabs who HAVE assimilated and are peaceful pretty much proves your point. 3 of 7, as well as many other muslim apologists, always forget the two crucial facts that are necessary to know who is wrong and who is not in this, and they are--
1) The Israelis just want to be left alone to live their lives
and
2) The Palestinians would like to Israel and all its non Muslim inhabitants wiped out.
Unlike their Infidelophobic neighbors, The Israelis have no problem living with people of other religions: Muslims, Christians or anyone else within its borders or around them, they just don't want people blowing them up.
As to your solution I find it interesting. I probably don't agree, but nonetheless its good to see some original thinking going on there.