As you may well know, the Olympic torch relay has had considerable controversy surrounding it. The torch (pictured right), as I noted earlier, is going all over the world, and is currently going

The protests have not been limited to cities where the torch is. In San Francisco on April 7, climbers got onto the Golden Gate Bridge and put up signs with slogans along the lines of, "Free Tibet 08". Senator and presidential candidate Hillary Clinton announced that she wanted President Bush to impose a "partial boycott" of the Olympics by not participating in the Opening Ceremony because of China's failure to deal with both Tibet and the Sudanese situation in Darfur5.
Chinese embassies from places like Budapest, Vilnius, Rome, and Reykjavik have been bombarded with protesters, symbolizing international pressure on China to do something regarding Tibet. In The Hague, protesters stormed the consulate, replacing the Chinese flag with a Tibetan flag (pictured below: this flag is illegal in China)6.

For China, this is an international PR disaster. The torch relay was, in a sense, China's big "homecoming," with its magnificence. The Chinese have been planning everything down to a tee to make sure that everything ran flawlessly. 123 days before the opening ceremonies, the torch relay has been in every sense a nightmare. Mobs, protesters, Tibetan flags: the magnificence of China's torch relay is, in a poetic sense, going up in flames.
The only people in the world unaware of the disaster that is slowing unfolding toward Beijing are, unsurprisingly, the Chinese themselves. Extensive censorship of news coming into the country (and news coming out of Tibet) has limited the government's image in its own people8.
Nonetheless, China must be worried right now about what's going to happen. After all, if protesters are doing this to torchbearers in their own countries, what could happen in Beijing. With on the order of two million people headed to Beijing in August, how many of them could be protesters, and of those, who might become violent, resorting to terrorism? Big name events (especially where the Chinese may be favored and the opening and closing ceremonies) could be especially lucrative terrorist attacks. The question now is what China will plan on doing to protect its tourists (and thus, its image--the all important factor of the 2008 games)? It remains to be seen how China will work out its Olympic troubles.
References
1. Wikipedia: 1996 Summer Olympics
2. IOC plays down troubles as Sydney Olympics approach
3. Wikipedia: 2004 Summer Olympics
4. Olympic Torch Run in Paris Halted as Protests Spread
5. Clinton calls for partial boycott; torch protesters scale Golden Gate Bridge
6. Wikipedia: 2008 Tibetan Unrest
7. Olympic Officials May Reconsider Torch Relay
8. Chinese Media in Spin of Indignation