That actually sounds like a great solution for some companies. Wonder if Google Docs will add this anytime soon.

It'll make the cloud app much less useful (mobile access issues, etc). However I think its worth it in certain cases, like if you're a high profile startup or a bank.

If it's available as a per file option it balances the usefulness. For documents that need high security you can choose it. Mobile devices should still be able to connect in through a VPN right?