As I see it, there are four possibilities (well, five, but I don't think the zeroth is that viable):
0. Status quo ante. Armed semi-truce with the Arabs in the Territories. Continual low-level shelling or missiling of border areas. Occasional flare-ups of major military activity. What we have now, which is pretty unpleasant for all concerned. Israel holds the water supply, the job supply (if only because the Pal-Arab kleptocrats have no interest in economic development), and food supplies (because they have ports and roads), the Pal-Arabs have the publicity upper hand, and a lot of will for self-sacrifice.
1. Two-state solution. Two states, probably with the PA in two separate chunks with some kind of safe-conduct corridor between them. Totally separate populations. Treating equally as nations for water, electricity, and jobs. Recognizing each other's existence. The Pal-Arabs are totally uninterested in this; if any express interest, they'll probably be killed by the leadership.
2. Heavy-duty armed occupation, as existed before the Intifada I, up to the 1980s. Nobody's happy, planes are hijacked, terrorism is mostly outside the country. Everybody's unhappy.
3. Annexation. The 5 million Jews in Israel would be a majority for a while, but the higher Arab birthrate would, within a very few decades, make an Arab majority within the unified state. That way lies the end of the Jewish state, through demographic suicide.
4. Transfer. The idea that got Meir Kahane declared a racist and thrown out of the government. Expel the Arabs who live in the territories, send them anywhere else in the Dar al-Islam, complete the population exchange that was begun in the 1950s. The Greek/Turkish population exchange worked, not without a lot of pain. The Armenian Genocide was similarly to the Jews, a one-way population transfer, and it was a disaster. Why don't we hear about the Jewish Genocide perpetrated by the Muslim world in the 1950s? This would really turn Israel into a pariah state. It would probably bring in an invasion by America to punish Israel after the expulsion was over. Never mind the poetic justice that Jews have been expelled everywhere, I can't see this working.
So we are left with 4-1/2 unpalatable options. The two-state solution is the least unpalatable, for all parties, but one party for some reason doesn't want to see it that way, would rather, probably for publicity reasons, remain a victim non-state. When my friend starts ranting about the unacceptability of the two-state solution, I post the above list again, and he has no answer.
And so we have the current Gaza invasion. Who knows where it will lead? Back to state 0, as Harold Feld expects? Or is it a move towards another position, perhaps another heavily-armed occupation?