Update 06 03 08:
The streets of Dili continue to be quiet, with the state of emergency set to continue till the 21st of March..
The main manifestation of this is a strict curfew in Dili from 10pm to 7am. During daytime hours apart from heightened security you would not know anything was amiss.
Most rebels have surrendered and there have been no incidents reported since these did so.
The internal strife is far less likely to affect you than the normal risk of travelling in low GPD countries such as road accidents and tropical illnesses. Certainly if you are comfortable going to Goa you should be OK to come here. The writer has twice been forced off the road by UN vehicles driving recklessly at speed through populated areas. Paradoxically he believes you are at almost no risk from internal strife but you must beware UN vehicles!
There have been a few incidents where foreigners have got caught up in the internal strife and injured (eg rocks through windscreens), but just a few and none in the last few months. The country is like most low GDP countries where you have to exercise common sense as you travel.
The UN staff frequent the Cristu Rei region, and joggers use this route and along the seafront in Dili. The leisure beach is packed on Sundays with people relaxing and messing about in the water.
Taxi drivers will not normally take you to or through troubled areas.
Tour guides can keep you in the right places and company’s such as eco discovery will be able to get you to great secure locations.