funny you mention this, i just read:
Privacy and Google Desktop Search
Google is commited to making search on your desktop as easy as searching the web. We recognize that privacy is an important issue, so we designed and built Google Desktop Search with respect for your privacy.
So that you can easily search your computer, the Google Desktop Search application indexes and stores versions of your files and other computer activity, such as email, chats, and web history. These versions may also be mixed with your Web search results to produce results pages for you that integrate relevant content from your computer and information from the Web.
Your computer's content is not made accessible to Google or anyone else without your explicit permission.
You can read the Privacy Policy and Privacy FAQ online.
http://desktop.google.com/privacypolicy.html
I think google will be alright even without the ads... it extends the brand as google being #1 and the ONLY choice when it comes to any kind of search. This tool is awesome.