According to the report this OS is internally referred to as Goobuntu, it's based on Ubuntu.
It's possible that it's just one of the toys Googleplex engineers play with on Fridays, when they get time off from buffing the search engine code or filtering out entries about Tiananmen Square.
It could be for wider deployments on the company's own desktops, as an alternative to Microsoft, but still for internal use only.
But it's possible Google plans to distribute it to the general public, as a free alternative to Windows.