While I find Michael Tarazi's rhetoric a bit extreme (i.e. his use of the word "colonies" to describe the settlements, which conflicts with his later claim that Israel and the Palestinian terrorities are already a single de facto state), I think the future of the peace process may be an "one state solution." While I do not doubt that the idea of one state is radical (another concept that Tarazi rejects), and directly opposed to the Sharon government's current policy of disengagement, it would certainly eliminate the conflicts over land allotment that had characterized previous peace negotiations.
If such an initiative were to succeed, a dramatic reconstruction of the region's identity would be needed. Instead of the traditional view of the region as two separate territories, one Arab and one Israeli, the new nation would have to define itself as indivisible, while maintaining its religious diversity. Since there is already a sizeable Israeli Arab population, the "Jewish identity" of the new state would not necessarily have to be lost. While the state would have to embrace secularism in order to succeed, the Law of Return could be expanded into a general statute allowing religious refugees of any faith the right to immigrate into the new state.
Political considerations aside, the greatest danger to the new state would be the threat of religious extremism similar to that which plagued colonial Palestine prior to 1948. However, I think if the resources that Israel currently devotes to terrorism were augmented by a hefty supply of international aid, including military forces if necessary, the new state could not only survive, but thrive. It would certainly be difficult, but the chances for success are greater than the current chaos, disorganization, and fear.