What is "do what is right"? What is your brilliant plan?
Do you know how many times Palestinians from Gaza, which is walled off, have infiltrated Israel and committed an act of terror (i.e.: a suicide bombing)? The correct number is one, the Ashdod bombing. The number of suicide bombers coming in from Judea and Samaria has been greatly reduced by a combination of the (still incomplete) security fence and IDF action.
It is certainly true that the fence won't stop Qassam rockets. It is also true that it won't stop the IDF from taking action against those who threaten or attack us. The fence works. It is not a perfect solution, no. When you come up with a perfect solution, one that will actually work and not threaten Israel's very existance, please do let us know.
One thing we will not do: allow ourselved to be destroyed. This isn't an either/or thing the way you descibe it.
Exterminate all terrorists and their supporters. Last year, Israel had an opportunity to take out a bunch of terrorists but they used a smaller bomb than they should have because they were worried that "innocent" Arabs might be killed. The terrorists weren't killed. In another incident, the Israelis use ground troops, exposing them to greater danger (and some of them were killed), to avoid killing "innocent" Arabs. The Arab culture is one of hatred and death. They glorify it and teach it to their children. While there are some Arabs who are truly innocent, the overwhelming majority allow the culture to go on. If the Israelis continue to care more about innocent Arabs than innocent Jews, they will be destroyed.