[Note: I've added some details to this post... It's been slightly beefed up...]
India and Pakistan will be having talks in June. BBC has a great visual/text analysis of seven possible future plans for Kashmir. They include formalizing the Line Of Control (LOC), giving all of Kashmir to either India or Pakistan, creating an independent Kashmir, creating smaller independent Kashmir (in the Kashmir Valley only), and dividing Kashmir at the Chenab River (which would give most of Kashmir to Pakistan).
The maps and the demographic charts simplify some things that have always been a bit fuzzy in my mind. To begin with: Jammu is a Hindu majority area, while Ladakh is a Buddhist-majority area. Kashmir Valley and all of Pakistan-controlled Kashmir are overwhelmingly Muslim. There is an area of eastern Ladakh that has been controlled by the Chinese since 1962. The line between Indian and Chinese-controlled areas is called the Line of Actual Control (LOAC), but in fact the precise contours of that line are fuzzy. Earlier, groups like the JKLF (Jammu and Kashmir Liberation Front) party promoted a concept of Kashimiriyat, which privileged Kashmiri ethnicity over religion as the basis for nationality, and argued for a secular, independent Kashmir that crossed all religious boundaries. But now, relations Hindus and Muslims in Kashmir are so polarized that Kashmiriyat is rendered irrelevant. Kashmiri Hindus want India; Muslims want Pakistan; Buddhists want autonomy, but in India.
Of the 7 scenarios presented in the BBC maps, I like scenario 5 the best in the abstract, as it asks for small sacrifices from both India and Pakistan, and also gives the Kashmiri independence movement what it wants in the only area where it is still somewhat dominant. At the same time, many of the key strategic questions are resolved in such a way that India and Pakistan will remain satisfied. But neither India nor Pakistan are interested in creating an independent Kashmir, even in reduced form.
There is also an eighth scenario I can imagine, which would entail India keeping Jammu, Ladakh, and the northeastern areas around Kargil and Leh up to the current Line of Control. But in the Kashmir Valley India could withdraw. To balance the territorial loss of Kashmir Valley, India could get some territory on the east side that is north of the LOC. It's all mountains, but on paper no territory would be lost.
There are problems with that scenario too -- no Indian politician wants to concede the loss of Srinagar. But something has to give... If no territorial changes will be on the table this fall, the best that can be asked is for Pakistan to stop supporting the separatists, and for India to improve the law-and-order and human rights situation. That defuses the situation, and seems to support the ultimate formalizing of the Line of Control.
[See this excellent essay (PDF) by Meredith Weiss for deep background on the Kashmir conflict. She begins with the sale of Kashmir to a Hindu Maharajah (Gulab Singh) in 1846, and ends with the Kargil conflict.]