Of course, by now, you're probably thinking "Are they crazy? That's the worst idea since nuclear-powered airliners". Google, though, claim that they have a robust security model. The instruction set available is restricted, with constraints placed on the format of the code, allowing a code inspection process to detect any dangerous instructions. Google argue their case in a research paper; I'm not sufficiently familiar with recent x86 assembly language to verify their claims, but it looks like they certainly put some thought into it. Of course, there are a lot of very bright people in places like Russia, Romania and China who would also put a lot of thought into it, to entirely different ends, so there are reasons to be concerned.
Of course, such an idea opens all sorts of strategic possibilities for Google; if it works, it would reduce the desktop operating system to a commodity. If any kind of application can be used as a web service, why buy a copy of Windows (or a PC with the Microsoft Tax in the price)? In fact, why bother installing a full-scale Linux? They're already starting to make PCs with cut-down instant-on operating systems (typically Linux-based) in the ROM, so that if you can't wait for your Vista box to finish booting, you can boot into the instant OS and get a web browser. Now, imagine a box like this, only with the OS being able to run web apps at native speed, perhaps in an application-oriented browser like Chrome. Could this be the much talked about "Google OS"?