There are Arab Israelis who fought alongside Israeli Jews in all three wars. They consider themselves loyal Israeli citizens. How can that be? Because they have a stake, and they know that whatever social, moral or ethical problems their government has, it beats the heck out of the corrupt states surrounding them.
As for the PLO, Israel agreed to self rule except for military units, and in essence helped to create the racketeering organization. Of course, easy to point fingers in hindsight, but I don't think its a policy that bears any fruition of peace, and annexation and assimilation do.
Oh. You believe the PLO has only existed since Oslo. So you don't even know the most basic basics. Go back and read your modern history :).