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I'd purchase e-books with advertising, especially if said advertising brought the price down to a level I was happier with. And of course, if they bring it down to free, well, I'll be very happy...
Everyone I know seems to just assume that e-book ads will automatically take the appearance of animated, screaming figures in neon colors jumping up and down for your attention... like what you see in the worst web page ads. But the evidence of plenty of static, basic ads on the web should be enough proof that it doesn't have to be so. So I consider those "horrible ad" assumptions to be overstated and unlikely, except in the most extreme situations (ie, you'll probably see that stuff in porn lit). I guess we'll see someday.
If I was to pursue ads for my e-books, I would hope to be able to fully subsidize the books, and therefore offer them for free. But I would also exercise some restraint with the advertisers, demanding the ads be of a certain type and level of sophistication, or simply refusing to accept their money. Any author should be able to do this as they desire (including, if they desire, accepting the horrible ads if it pays them enough)... it's their choice.
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