In-game ads aren't terrible when they're appropriate; I wouldn't mind seeing, for example, a huge pepsi billboard in Rainbow Six, Vegas, as it seems more realistic in a city setting like that, or even things like a pepsi ad in a Grand Theft Auto game, since those games are loosely based on real life (though that's treading the dangerous line where the anti-game fanatics would preach about how it's too close to real life with RL product placement in it)...
Hopefully, however, we won't ever see ads where they are *not* appropriate... A Burger King sign in God of War, or a Mountain Dew potion in Elder Scrolls would be horrific, for example; I can't imagine any kind of advertising revenue a company could stand to gain that's worth that kind of debacle...
~WalkingTiger