There are so many angles on the Russia-Georgia situation that it's hard to know where to begin.
This is a very inconvenient conflict for nearly every major country in the world. The US and Europe were trying to include Georgia in NATO, Russia is obviously involved, China must be really ticked off at having its Olympic Ceremony overshadowed. This last point is a bigger deal than one might think at first. China had been getting mostly negative press, but the Olympic ceremony was going to be the start of a period of more positive coverage. Instead, the conflict will dominate headlines for the next week or more.
Russia's spin on the matter has been that it is defending South Ossetians, just as NATO defended Kosovo. Of course, Russia has vigorously suppressed it's own separatist movement in Chechya. I'd guess that Russia will end up downplaying this perspective in favor of the one it has vigorously pursued since the end of the cold war, namely that it has the right to intervene in countries to protect its "citizens". However, what it will do with the "citizens" streaming across the border is unclear, since Russia generally likes to keep its citizens in their home countries.
Georgia, on the other hand, was hoping to put an end to the issue and perhaps also regain South Ossetia's natural resources at the same time. It probably would not have been a pretty takeover, but probably better for the civilian population than being caught in the midst of a war between two militaries.
An added wrinkle is the fact that Georgia's military has had some training from the US and experience in Iraq, where it currently has 1000 members (although it's probably cycled more of its military through the country). Their assistance in Iraq strengthened the case for joining NATO, and also would have been useful counter-insurgency training, had they taken South Ossetia easily.
So what's going to happen from here? It really depends on what the rest of the world does. A ceasefire is possible. But even if there isn't a ceasefire, international pressure might limit Russia's options. If this is a land battle, Georgia's well-trained and reasonably large force has a good shot at holding out, and if the conflict drags out long enough its closeness to the conflict should be a major advantage once weather conditions deteriorate. However, if Russia is allowed/decides to aggressively bomb targets in Georgia, it adds a whole new dimension to the conflict and raises the possibility of international military intervention.
It's a tricky conflict, and the best way to "resolve" it might even be to hope someone wins in the next week. Diplomatic resolution would be complicated, since restoring the status quo would be a victory for Russia, and only a temporary solution, while if Russia pulls out the province would be easily overrun. However, Georgia's military situation is stronger than it might seem, and it is hard to just who will win this battle.
Also, there's an interesting contrast between German news sites and British, American, French, etc. "Der Spiegel's" main article is about "Thousands Flee...", and other german newspapers also seem more focused on the "human aspect". This is an interesting contrast with other countries, which tend to put the prospect of war first and foremost.