The pallys aren't in Israel. Neither are they under Israeli control.
It's like saying that the US isn't a democracy because mexicans in Mexico can't vote in our elections.
You say that despite Netanyahu's last minute flip flop proclaiming that there will be no two state solution?
So what about the hamas and fatah proclamations that there will never be a two state solution, have you just ignored them completely. Have you read the Palestinians charter that calls for the mass murder of the Jews and the destruction of Israel. Or the speeches by Palestinian leaders that all on the Palestinians to fight to the last man before agreeing to a two state solution. That is what Netanyahu is talking about, the Palestinians refusal to talk peace and mutual borders unless their demands for illegal conditions are first met.