http://answers.onstartups.com/questions/19422/if-im-working-...
Basically the message is "Sure work on your own projects and we will decide it's no longer in our best interest in employing you." and "If you do a side project and publish it or let it out in any way, we may decide its no longer in our best interest to employ you." I have heard stories of course but only have first hand knowledge of one person with whom Google decided to fire because they did some open source work they didn't like.
When I asked an employment attorney about these sorts of things his advice was that I could probably sue them and win but it was simpler and less expensive to just quit if I really wanted to work on other stuff.
That, or publish the code under a pseudonym.
Wow. That's quite a statement, I'm pretty sure there would be quite a few people that would like to see a bit more on that. Both from the perspective of having google as a future employer as well as to make sure you didn't make it up, it's quite a statement.
This is often referenced when a question like this comes up.