It's frustrating, but we have to pick our battles, and we can't fight everyone at once. Pakistan is a rat's nest of terrorism and extremism. Musharref is keeping it relatively under control, and that's probably the best we can do while we deal with other countries.
The only plausible alternative I can see is to go in and do an extermination job, killing millions of Pakistanis and sending them back to the stone age.
Let's keep in mind that they have nuclear warheads and delivery vehicles, courtesy of bill clinton and the Chinese. So if we went in, we would really have our work cut out for us making sure those things weren't used. It's probably not possible to tackle such a demanding job while we have so many other things on our plate.
We can only squeeze Musharref so hard. His hold on power is tenuous, and his replacement will likely be worse. Assuming we could project the combat power into Pakistan to winkle Osama out of his cave, we will have invaded an "ally", causing Musharref's downfall and stranding CFC-A AND ISAF deep in Central Asia. Does anybody remember what happened to the Kabul garrison in the First Afghan War?
The Muslims who remained in India (there are more Muslims in India than in Pakistan) are not exterminated, nor are they living in the stone age.
Return the Punjab, Kashmir, Sind, NWFP and Baluchistan to their rightful status as part of India, and all the problems you correctly cite are gone.
And let the Indians, who are not burdened by fear of being "crusaders" and by multicultural nonsense, take care of business.