The Tamils are mainly concentrated in the north and east of the island, around Jaffna. There has been at times a de facto Tamil government there, but the ownership of the area tends to oscillate depending on who won the last major battle. Early in the year, Jaffa was captured by Sinhalese forces, and the rebels were laying fairly low when we came in March.
Around July, the rebels mounted a major attack on a Sinhalese base and won rather decisively. They are certainly not to be discounted.
There has been some friction between Sri Lanka and India, because it is widely believed that India (with its Hindu populace) sympathized with the rebels and suported them with training and weapons. This is not suposed to be the case any longer, however.
The Sinhalese and the Tamils have their own languages, customs, and religions - like Ireland, only worse. The poster on the left is in Sinhala, the one on the right is in Tamil.
Since the Tamils and the Sinhalese have relatively little in common with each other (not even a common language - there were riots at one point when the goverment declared that it would replace the English characters on license plates with Sinhalese - and only Sinhalese), the conflict seems likely to rage on for a long time to come.
Historically, foreigners have never been targets of terrorism. Accidents happen, of course, particularly with bombs, but it is generally safe to travel in Sri Lanka, particularly away from the north and from Colombo, the capital.
We saw little of the conflict ourselves. There were armed soldiers on the street in some places, particularly around the Temple of the Tooth in Kandy. The banks had armed guards as well, equipped with metal detectors. While we were there we found an article in an English newspaper noting that three bombs had been found in a garbage dump. Apparently they were just being stored there.
We didn't enjoy hanging around Colombo, though. And the airport security was pretty thorough compared to the States.