These combined results can be seen only from your own computer; your computer's content is never sent to Google (or anyone else). (full)
Then yesterday Google released a new version of the desktop tool (3.0) and it includes a new feature, Search Across Computers. This allows you to search your own files (Word, Excel, PPT, PDF and Web history) from other computers. This looks like a quite useful feature: you're travelling without your laptop and something comes up and you absolutely need that spreadsheet. You can call up someone, give her/him your password and access to your computer, guide her through your files tree, and so on. Or you can borrow the first connected computer, log onto your Google account, and retrieve it.
In order to do this however, copies of your files must be first uploaded to the Google servers:
We first copy this content to Google Desktop servers located at Google (...) your data is never accessible by anyone doing a Google search. (full)
That's a big, big difference from the previous privacy language. There is a lot of embedded "trust me" here.
Sure, if you install the new Google Desktop you can turn the SAC feature off, or limit what you upload to Google to only specific types of files, or delete your files from Google servers. But the general point remains: how much can we trust Google? (And all the others). They hold already an amazing quantity of personal data. If you hit "delete" will those files really be deleted? And as Eric so rightly points out:
Not to mention that once your data are there, they may be subject to other forces - think Department of Justice subpoenas.
Search Across Computers makes me question the wisdom of downloading the Desktop tool - which I haven't and won't. I have written a few weeks ago a fictional scenario based on this, but the more I think about it, the more "fictional" seems a rather poor wording choice. Way too many people seem not very concerned with the continuous erosion of privacy and of control over one's own data and information in the digital world. Many easily trade information for convenience. But assumptions that things that are private today will remain private tomorrow are, well, very weak assumptions. On this, read Don Dodge's "Living the Observed Life" (he used to be with Napster, he's now with Microsoft) and Om Malik's "Living a cached life".