If Google decided to censor your business would you be happy about it?
The millions of porn webmasters out there don't seem to be complaining too loudly. They're just as legal.
For now they'll let you find whatever you want, legal or not. They just won't give you any extra help along the way. I mean, even without the bells and whistles like autocomplete, spelling corrections, +1 suggestions, etc. you can still very easily find anything on Google without much effort.
It isn't Google's job to punish illegal activity but they have every right to take away the extra helpful tools that basically shove it in your face. In fact, why would Google even want to censor sites that contain illegal material? Forget the outrage about censorship for a moment. I think law enforcement would want "bad apple" sites in Googles index so they can be easily found and their owners prosecuted.