Before I get to that, let me explain what I'm not scared of, which is that Palin has somehow altered the demographics of the race. I have a hard time believing that female Hillary supporters, or Rust Belt men, are suddenly racing to support McCain because of Palin. For one thing, vice presidential nominees almost never attract demographic groups that the nominee can't attract on his own. People vote for the top of the ticket, not the bottom. More importantly, if that historical pattern somehow broke down this year, it would probably hurt the GOP ticket more than it would help. People may love Sarah Palin, but they don't think she's ready to be president.
The reason Palin scares me has more to do with mechanics than demographics: Palin is such a sensation, and draws such large crowds, that anything she says--particularly attacks on Obama--immediately become part of the campaign conversation. On the other hand, both because she has a knack for delivering barbs with a smile, and because voters don't quite see her as presidential material, McCain suffers less blowback than he would if a more traditional running mate were saying the same things. Simply put, Palin has a much bigger megaphone than traditional running mates, but gets held to a lower standard.
That's a huge problem for the Obama campaign. Among other things, it really complicates the question of how to respond. You'd normally want to ignore your opponent's running mate in these situations, but it's hard to because of her reach. And when you do respond--say, when Obama points out that she's been making stuff up--there's very little impact, because no one's conditioning their support for McCain on Palin. Call her the phantom menace.
Obama's best hope is that Palin's novelty wears off soon, at which point we can go back to ignoring running mates the way we've been ignoring Joe Biden the last week or so. I'm honestly not sure what he does in the meantime.