It is in fact Linux, albeit a scaled down version to eliminate a lot of the overhead that a "normal" OS carries, leaving only the web browsing capability, and little else.
Having said that, I'm sure someone will program up an app that will open up this OS and add the capability to install any application available to Linux, effectively creating a full-featured fragment of ChromeOS and a proper competitor to Windows. At the same time it could compete with other Linux distros like Ubuntu, Fedora, Suse, et al (or perhaps with Linux desktop environments like Gnome and KDE, depending on the work done to expand its use).
After all, it's Linux, which is open source. With open source you can dig in the code and make changes and improvements.
Let's just hope Google doesn't turn around and say "you can't do that", like Apple is doing with the AppStore and Sony is doing with PS3.