I think there is one basic problem that is never, to my knowledge, addressed by people arguing for a two state "solution." The Palestinians are just not ready to give the hope of conquering all of Israel and so there is little motivation for settling for a stare in the territories. Hamas says straight out that it will settle for nothing less, and Arafat demanded a right of return for all the refugees, which would have made Israel a Muslim majority nation, and pro Palestinian demonstrators chant "From the River to the sea, Palestine will be free" which clearly means they want all of Israel. There doesn't seem to be more than a smattering of Palestinians who would be content with a peaceful state in the territories, so while I understand the desire by much of the world to believe there is a peaceful solution, I don't see any evidence it might be achievable.