Hard to find out precisely what's going on. Russian sites such as Russia Today not to speak of the ever-hilarious Pravda seem to offer a mixture of genuine news and black propaganda. Civil Georgia has been off-line a lot. Some good analysis on Fistful of Euros and The Brussels Journal, and by Mark Ames on The Exile(d). Waiting for Gary Brecher to shed his light on events on the latter sites. Also check Wu Wei from Tbilisi.
At the moment, it seems like Georgian troops are retreating or have retreated from South Ossetia, though apparently they attempted some kind of counterattack just yesterday night. South Ossetians claim some 2000 dead - probably exaggerated, but the prolonged shelling of Tskhinvali (which seems to have been levelled - it's not a big town) must have led to a lot of casualties. The question is what the Russians are up to now - whether they will be content to control the areas in South Ossetia they currently control, whether they will continue to secure South Ossetia and Abkhazia by attacking Gori and Zugdidi near the Abkhazian border (Zugdidi has reportedly been bombed and the Georgian-controlled Kodori gorge in Abkhazia has been under attack) or whether they will try to grab the whole of Georgia.
I'm still not quite sure what on earth Saakashvili was thinking. Either he attempted a lightning-quick grab of the main roads in South Ossetia in order to present the Russians with a fait accompli, or he was coaxed into a trap by South Ossetian skirmishes earlier last week (both possibilities discussed by Fistful of Euros). Either way, he seems to have succesfully made himself into a punchbag for Russia's newly assertive military. Which appears to have been suspiciously ready to intervene.
There's no good solution to the conflict. The natural border between Georgia and Russia is the high Caucasus, and to make the country at least somewhat defensible, Georgia had no choice but to try and gain control over South Ossetia. Tskhinvali lies on the central plain, very close to Gori and the main road between Tbilisi and the west of Georgia. If South Ossetia would be occupied by the Russians or even annexed into the Russian Federation, Russia would basically militarily control Georgia. On the other hand, the ethnically Ossetian population of South Ossetia have been wanting to rejoin their kin from the north since the early nineties.
I lived in Tbilisi during 2001-2002, when Shevardnadze was still in power. I only once heard a Georgian say something positive about him - which was something like "Shevardnadze can't help it either". He was widely despised and blamed for the electricity blackouts, the unreliable water and gas supplies, the general poverty and anarchy as well as of course the Russian/Abkhaz control over Abkhazia (South Ossetia did not seem nearly as much of an issue. Most of the population of Abkhazia were ethnic Georgians, who had been driven from their country and living in poverty in Tbilisi at the time). But somehow Shevardnadze succeeded in playing both the Americans and the Russians without making a decisive choice for either. And South Ossetia too, as smuggling station, played a role in the anarchic ecology of the country.
I haven't been to the place since. Saakashvili has made a decisive pro-Western choice including Georgian participation in Iraq. His promise to re-unite the country succeeded initially with Ajaria in the Southwest, where local strongman Abashidze was driven out fairly bloodlessly, but stalled with Abkhazia and South Ossetia. I guess his patience ran out. But it's water under the bridge - I don't see how he can now dislodge the Russians from South Ossetia, or even politically survive this.
I hope the Russians will be content with their prize in the form of South Ossetia and maybe Abkhazia. There, they have local support. If they try to bring the whole of Georgia under their control, things will be quite different. It's a beautiful place, full of ancient churches, monasteries, wonderful castle ruins and craggy mountains and fascinating people with murderous driving habits. It's just located a bit too close to Russia.