There is also the issue of the 1949 protocols to the Geneva Conventions forbidding the mass expulsions of population. This is the issue which triggered the 1999 war and the legal basis for the NATO attack on Serbia.
I do think that peaceful means will work, if both Serbs and Albanians can get over mutual animosity. Kosovo is too small to be a nation, and too big to be a province. An economic union with closer transportation and energy ties would be a good entry. The steps must be mutual. Serbian property in Kosovo, including the Orthodox church properties, must be respected, and those who burned churches punished. Kosovo must be fully integrated into the Serbian energy grid. Language rights in schooling and work must be honored (though the language of government should be monolingual).
Furthermore, citizenship must transcend nationality. One could be a loyal citizen of Serbia+Kosovo without being a Serbian ethnically. That's the issue that has plagued former Yugoslavia in a nutshell. Maybe the country should never have been formed in the first place, but I can't go back and redo the collapse of Austria-Hungary (another state that foundered on ethnic intransigence).
Kosovo isn't Serbia as long as most of the inhabitants don't want to be Serbians. But, if the Kosovars have buy in, the province is restored, and Serbia becomes the example to follow in the Balkans rather than the state everyone tries to split from.
Milosevic gave strict orders to the 3rd Army NOT to harm any Albanians that weren't harming Serbs in 1999. The atrocities committed by Serb forces were committed by the paramilitary forces that Milosevic turned a blind eye (his biggest war crime in my opinion).
When the next war breaks out, I'll betcha the "nice" Albanians in Kosovo won't get the same consideration. I'm not saying this is going to happen tomorrow, or the next day, but that day will come. As for now, the Serbs are doing a great job of disrupting any possibilities that Kosovo is going to come even close to representing a proper "nation". They can keep this up for years. The Serbs are a very patient peoples.
I'm guessing the wrongs of Kosovo will be righted in the next 75 to 150 years. Just look at how much the maps of the Balkans have shifted over the last 150 years. You don't really expect the current status quo to be anything close to permanent, do you?