Years ago, while trying to learn more about all that fun interrogation/neurolinguistic stuff, I borrowed the book "Killing Rage", an autobiography by a former IRA member named Eamon Collins.
http://www.amazon.co.uk/gp/product/1862070474/026-3012326-2515614?v=glance&n=266239 He talks about what drew him to the IRA, how he withstood interrogation when arrested, what led him to break under interrogation a different time, and finally what made him withdraw from the IRA. He was ultimately killed by that organization for his outspoken criticisms.
One of the things that I remember very well was a point he made later on. Namely, that he realized the IRA could never win. But he also realized that the British police could never truly defeat them, either. Now, the rest of this is all stuff I'm sort of pulling from bits and pieces, so take it with a grain of salt.
Terrorism highlights all the problems associated with a 'Leviathan' type of government. Namely that when you centralize all the power, two problems arise. First - how do you identify those who are breaking the rules? You know if you're neighbor is doing wrong - but someone from another city won't. Therefore a centralized government will occasionally jail the wrong people and NOT jail the 'right' ones. The second problem is 'who watches the watchers?', i.e. if the policing force is itself corrupt it makes it hard to properly police everyone else. Terrorists may not be able to mount a coup and topple the government, they may never 'win' and create a pan-Arab Muslim state...but they don't necessarily have to. Because even if you kill all but one of a terrorist cell, if that one terrorist can mount a public attack it will show everyone else that they are still around, and not defeated.
From what I understand the British made true progress against the IRA in a couple of different ways. One is they had public cameras that allowed them to gain evidence on who was involved, better track the organizations, and be more effective at catching them. The other was that they started changing the way they handled Irish Catholics, thus removing some of the incentives/anger/hate that led to terrorist actions.
Terrorists are by definition small - if they had more manpower they would fight differently, fight more like a civil war or something. (though a class of mine did discuss what hte differences were between terrorism and an insurgency, and seemed to think the major difference is all in numbers. Now that we're calling events in Iraq an 'insurgency' does that mean there are enough members to move beyond terrorist actions?) Anyways - terrorist tactics are centered around the fact that they are relatively small. If they were larger, they'd be mounting attacks against bases, conducting raids, and cutting supply lines. Whittling away by ones and twos and conducting small scale operations with a big psychological impact (like Vehicle Born IEDs) are things you do to maximize your affect when you're small. And while the damage from these attacks is large in the sense that it creates a sense of insecurity and instability, (and large to a lot of the Iraqis who have taken some pretty massive casualties) it doesn't really threaten operations. Yet.
So in order to fight terrorists you have to do a couple of things. You have to show that they haven't 'won' by continuing with typical combat operations - arresting insurgents and mounting patrols, etc. But that just maintains the fight...to truly win it, you have to, have to, HAVE TO start thinking about two things - a) how to show that terrorist acts only lead to more death and destruction and b) that there are better, less violent ways of achieving your ends.
The fight isn't truly over until the average citizen thinks that a suicide bomber is a stupid violent idiot who is going to hell for killing himself (which IS against the Muslim religion) and that they are better off achieving their desires through peaceful methods. You have to de-romanticize these so called martyrs, make sure that when an Iraqi's loved ones are kidnapped and/or killed that they get angry at the terrorists instead of blaming the US for not keeping the peace, and show them a way to achieve the stability and respect they want without violence.