Okay, so sometimes things are announced that are simply too good to be true, like the Phantom, or models dating geeks. OnLive is one of those things. The concept is that you connect to the OnLive service via any web capable PC with broadband and you can play ANY modern game with a solid framerate. It is all dependent on your Internet connection.
It sounds to me like you are controlling the game remotely and it is working almost like a thinclient application, all you are seeing on the screen is literally video of the game you are playing…I think.
It sounds amazing, but can it really work? I hope so because if the price is right (say a 20 dollar subscription) I would buy it in a heartbeat. There is also going to be a micro console that you can connect directly to you HDTV so you can play the games on your big screen. If I can play Crysis or StarCraft 2 or other leading PC games on my TV or crappy laptop I will be simply amazed.
Serious/Gamer 
Digging even deeper, EuroGamers’s Richard Leadbetter writes about the service:The new OnLive game streaming service sounds amazing — being able to play PC games from basically anything with a TV nearby is a dream for people tired of paying thousands of dollars to upgrade their equipment. But are Rearden Studios’ claims about OnLive’s capabilities amazing because they’re impossible? Eurogamer’s Richard Leadbetter thinks so.First off, there are the hardware requirements. In order to run a new PC game at 720p, Leadbetter notes that each individual instance of the game will require “… the processing equivalent of a high-end dual core PC running a very fast GPU – a 9800GT minimum, and maybe something a bit meatier depending on whether the 60fps gameplay claim works out, and which games will actually be running. That’s for every single connection OnLive is going to be handling.” So OnLive is going to have to essentially buy one computer for each simultaneous connection it has.Second, there’s the video encoding. “The bottom line here is that OnLive’s ‘interactive video compression algorithm’ must be so utterly amazing, and orders of magnitude better than anything ever made, that you wonder why the company is bothering with videogames at all when the potential applications are so much more staggering and immense.” There’s a video example of the kind of compression needed even to approach this level of speed, and it’s not pretty.Finally, latency. In order for any of this to work, OnLive has to maintain “sub-150 millisecond latency from its servers at least, and a hell of a QoS (quality of service) to guarantee that this will in any way approximate the experience you currently have at home.”Leadbetter offers a few solutions, but they’re as unlikely as Rearden’s claims — like licensing OnLive data centers to ISPs in order to be closer to users.
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Having said that I am sure the company is building a cloud style rendering farm, even so they would probably need a rendering farm like Pixar’s
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