(I am aware that Setrak has already written a diary on this, but I've decided to try and flesh it out, since most people don't seem to understand the situation. My information comes mostly from Wikipedia and following the references there.)
As most of you probably know, Russia has ordered troops into the disputed region of South Ossetia after Georgia escalated the conflict by an offensive against the Ossetians. Georgia has withdrawn its 2000 soldiers from our Iraqi coalition, and although an actual declaration of war does not seem to have occurred, its clear that a war is indeed occurring.
My own take on the situation is that Georgia is somewhat at fault here for escalating the conflict, but Russia also seems to have had its moves planned out, and if its indeed escalating the conflict and moving against Georgia proper (rather than restricting its intervention to Ossetia) as Georgia claims, then its also at fault.
Conflict between the Ossetians and Georgia is nothing new - during the Russian Civil War, the Ossetians launched a bloody Bolshevik-supported uprising against the Menshevik Georgia government; eventually, the Red Army intervened and was joined by many Ossetians. Afterwards, however, the two groups seem to have been peaceful up until the breakup of the USSR around 1989.
Essentially, what happened was that Georgia wanted South Ossetia, and many South Ossetians wanted to join North Ossetia (basically a part of Russia) or form their own nation. This escalated into the War in South Ossetia from 1991-1992. There was apparently minor Russian involvement, but the war was fought mostly between Ossetia and Georgia. After a coup d'etat against the Georgian president, causing significant instability, a ceasefire occurred in which South Ossetia became de facto independent, though internationally recognized as part of Georgia.
It should be noted here that Georgia seems to have a lot of internal dissent - Reuters has an article from 2006 on how Georgia has treated its minorities. South Ossetia is not the only de facto independent but internationally part of Georgia state - another one is Abkhazia, which may also join the war against Georgia (according to wiki - reference is in Russian so I can't understand it.)
There have been several flareups in Georgian-South Ossetian relations since 2004 or so; the most major one began on August 1, when a 'sniper war' began occurring between Georgia and South Ossetia; both sides blamed the start of conflict on the other. During this time, Georgia appears to have been moving tanks and soldiers towards the border. Considering Georgia's response to this 'sniper war', I think its likely that this escalation of the conflict occurred as part of their plan.
On August 7-8, Georgia began a large-scale invasion of South Ossetia. According to Wikipedia (russian references, again), many South Ossetians began evacuating to North Ossetia (part of Russia), and Georgia bombed these fleeing refugees. Abkhazia began to send volunteers towards Ossetia at this point. According to Georgian officials, they took over 2/3 of South Ossetia, and surrounded its capital, Tskinhvali.
In response, Russia began to intervene in the conflict on the Ossetian side, moving tanks into Ossetia, a move which Georgia described as an invasion. However, Russia does not appear to be restricting the conflict to Ossetia - it has reportedly bombed airbases next to Tbilisi, the Georgian capital. Georgia also claims to have downed two Russian jets over its own territory. Russia denies these claims. There are US instructors stationed at one of the bases Russia supposedly bombed, so this should be cleared up soon enough.
Georgia has created an analogy between itself and the Winter War, when the USSR invaded Finland. My interpretation is that if this is like the Winter War, its with South Ossetia being Finland and Georgia being the USSR - complete with pro-Ossetian Cossack and Abkhazian volunteers (similar to the aid to Finland)... of course, this analogy doesn't include Russia.
Russia controls most of the natural gas supply to Europe, so the European Union and most of the Eastern Europe former-USSR countries can't do much to intervene. China has criticized the attack (as an act of war during the Olympics, when there's supposed to be world harmony), but its probable that they are quietly supportive, given the strategic alliance between them and Russia. And of course, the US is in no position to intervene in any way, given our commitments in Iraq. Plus, if you thought that invading Iran would cause a world energy crisis, Russia has the world's largest natural gas reserves, and is the world's leading energy exporter. But it seems like Russia has had this planned out for a while, and though the world is going to protest, there isn't anyone capable of stopping it from taking over Georgia if it wishes. The question is, of course, if its escalating the conflict to Georgia (as Georgia claims) by bombing Georgia proper, or if the conflict is only over Ossetia.
A few maps:
Undetailed map showing locations of Ossetia and Abkhazia inside Georgia
Detailed map of Abkhazia
Detailed map of South Ossetia