I suspect the timing of the escalation has something to do with Georgia’s efforts to join NATO, coupled with the local power to perhaps do something to block it. It’s bad enough to have American troops (about 500, I believe, training Georgian forces). The Baltic members joined before Russia was in a position to do much about it. Now Georgia, with Ukraine and Moldova next in line.
This could be an attempt to draw a line and protect what the Russians see as their natural sphere of influence. As far as the Russians are concerned, Western influence in these areas have gone much too far already.
Besides, what are the Americans going to do about it? The US has no treaty obligation to defend Georgia, the American military is already overextended, and nobody wants to see American and Russian forces shooting at one another. Last but not least, Russia has had "peacekeepers" in Ossetia for years.
On the ground, Russia appears to have the advantages. Then again, it also did in Finland. And Chechnya. And Afghanistan. Even if the Russians win, if they don’t win quickly (and what do they say they want, anyway?) this could be expensive.
Best guess for the outcome: international condemnation, lots of back-channel negotiating, an unspoken understanding to prevent Georgia’s formal membership in NATO, troops back to each side of the Georgia-Russia border, and a jump in arms sales. In the meantime, people will die.
UPDATE: There were already Russian “peacekeepers” in South Ossetia, supporting the separatists. Jane’s (the best available source) reported this morning it was the Georgians who struck first, apparently “to fully restore its control over the entire separatist territory, rather than a continuation of the sporadic tit-for-tat violence seen in the region over recent years. Georgian forces have mobilised its reserves and launched the attack using tanks, heavy artillery, Grad multiple-barrel rocket launchers and Su-25 attack aircraft in support of its infantry.” From the point of view of Georgia and almost all other countries, the "disputed" territories are part of Georgia, it is within its rights to do this. But progress was apparently being made to end the hostilities. If Georgia chose to start this, now, Georgia has been remarkably stupid.