I find it interesting that so many Anti-Israel critics fail to note that more Palestinians have been killed by surrounding Muslim nations then by Israel.
Yet at the same time I must disagree with the idea that Israel has found a proper balance between being democratic and security minded. More precisely, I see too much in terms of both xenophobic and semi-theocratic attitudes. Many Israelis, including leading officials wish the nation to be more of a religious (Jewish) state, instead of being more of a democracy.
And many really don't see the Palestinians as fully human. One reason not mentioned for building the fence for example is that the Israeli government fears the rise of a Palestinian majority.
To this day Israel still has discriminatory anti-Palestinian laws:
http://www.arabhra.org/article26/factsheet1.htm
A poll on Israeli's show that most Israelis actually want the government to start making Arab Israelis leave:
http://www.haaretzdaily.com/hasen/spages/441646.html
Now I'm not saying I think both sides are equally to blame, Palestinians are more so imo, especially in light of their inability to come to an agreement at the Camp David.
In 2000, Clinton convened a peace summit between Arafat and Israeli Prime Minister Ehud Barak. Stunning both the Israeli right and left, Barak offered the Palestinians approximately 95% of the disputed territories, as well as Palestinian sovereignty over East Jerusalem and the Temple Mount, Judaism's holiest site (also called Haram Ash-Sharif). Unfortunately, Arafat did not only reject this unprecedented offer, he did not make any counter offers. The talks ended without any agreement and, according to Israel, Arafat returned to Ramallah intending to foment violence
http://en.wikipedia.org/wiki/Israeli-Palestinian_conflict
This imi is due to many reasons, including an intrinsic culturally bigotry on the Palestinian's part:
Many experts in Islamic society, including Muslims, Christians, and Jews, hold that one of the primary religious reasons for continued Muslim Arab hostility towards Israel is that Islamic law forbids Jews or Christians from being considered equal to Muslims.
http://en.wikipedia.org/wiki/Arab-Israeli_conflict
But such does not justify by any means a theocratic or segragationist attitudes on the part of the Israeli community. Instead of calling for a unique Palestinian state (something sought by the US, Israel and Palestinians), instead they should try more integrationist policies, adopting the Palestinians within their own democracy.
I of course do not believe this should happen at a gross loss of security, for example I still support the building of a non-intrusive Israeli-Palestinian fence, but I think Israelis should start seeing Arabs as their equals, encouraging both integration and citizenship; not a government that "encourages" Israeli Arabs to leave.