1) Yup, the flaw does exist – http://www.readwriteweb.com/archives/security_flaw_in_google_chrome.php Embarrassing for Google if you ask me because better security has been one of the key selling points for Chrome.

2) You are right, even I think it will eat into the IE share. But a more visible and immediate impact will be the erosion in the Firefox market share. Even though a huge chunk of Google’s revenue still comes via ads I think this percentage will go down over the next few years with income from other sources such as hosted apps going up. But even in that respect it helps them to control the user end-point, you can incorporate software (Gears) that helps your online services, have defaults that help you and so on.

1) apparently google’s used a previous version of webkit, which they sourced from Apple. Has a security flaw as a result which could be taken advantage using a malicious executable file (java based, from what I read)
2)While chrome will definitely eat into Firefox’s early adopter user base, their main target continues to remain IE. But the bigger picture is that its all about protecting its search engine market share (bout 69% in the U.S and 80%+ in UK). Though they do offer the option to change the default search engine, Google still remains the default engine on the browser, and by virtue of that, will continue to earn its millions in ad dollars.