There was a general transfer of population between the two mandated states, Israel and Trans-Jordan. All of the Jews in the Arab region were quickly transferred into Israel, while all of the Arabs were supposed to be transferred into what was then Trans-Jordan. The first Israeli prime-minister offered the Arabs amnesty, and many of them stayed in what was now Israel. Many however left. Since then the Palestinians have been run out of their mandated homeland of Trans-Jordan, and have now decided to try to take back Israel. This splitting up of territory and general transfers of population was very 'in' at the time, for example, India and Pakistan.
Now, if you take a look at any current statistics, you will see that the total Jewish population living in the rest of the Arab world numbers in the low thousands. Why? Because due to persecution and the transfer, they HAD to move back to Israel. It was not only the poor Palestinians who were affected. Many Jews gave up their past ties to regions that had been strong Jewish comunities for centuries. The same goes for the Palestinians. They either had to move or stay, and the large number of them moved. It is not a great way to solve the problem, but make no mistake, the transfer of lands was completely two-way.
Also, when the mandated land of the Palestine region was split, over 90% of 'Palestine' became Trans-Jordan. Israel accounts for only 10% of what people now like to call Palestine. It is a wonder how nobody accuses the Jordanians of being occupiers, seeing as they in fact occupy 90% of Palestine, and effectively removed the Palestines in the 70's by force due to their violent nature.
Does this clear it up a little?
In 2000, Israel had a population of 6,300,000. Of that population, 5,150,000 were Jews, 1,150,000 were Muslim, and 376,000 were other (Christian, Druze, etc.) Isreal is a secular state. One doesn't have to be a Jew to be a citizen of Israel. If the goal was the complete elimination of all non-Jews from the area, they didn't do a very good job of it.
Arafat had the opportunity to take a good deal from Barak, including a significant concessions of of territory occupied by Israel since the 1967 war. He chose not to take the offer, his rhetoric has conditioned his followers to reject any compromise. He's in an untenable situation. If he had accepted the compromise deal, he would have faced revolt from his followers. But in rejecting the deal and ratcheting up the level of violence, he's put his followers into a postion that they cannot win. As the polarization continues, there will be less and less support for negotiations from the Israeli's, and eventually, this violence will provoke an all out war that the Palestinians cannot win. It's ugly, it's brutal, and it will get far worse before it will get better.
But the fact is, the state of Isreal DOES exist. And the State of Israel has the right to defend itself against those who would attack it's citizens. The Israeli government has shown significantly more restraint than I would have anticipated, and I think the tide of world opinion is turning against the Palestinians. It was up to Arafat to prove he was a visonary leader, not just another politician. He failed.