As an Android user I must say that I really hate ads. I don't mind paying for apps, but I don't use apps that are infected with ads (even if they are free). In fact, if there's a premium and a free version available I almost always install the premium version first.
Ads can work if you follow one very simple rule: Respect your users.
I have one two day app where the adverts are only shown in the option menu and with enough pre-padding and active padding that an accidental click is impossible. A user almost has to search for the advert and I'm still getting good numbers and a good CTR of over 2%.
Ads shouldn't be displayed during gameplay also. Ads should be reserved for title pages and options menus.
As a proto-counterexample, Angry Birds ad placement is such that it gets in the way of playing the game. I'm wondering what psychobabble has prevented them from providing a simple paid version.
Another common tactic is to force-insert an ad at the top and shift all content down. Not only is it poor programming, but it is a con to get accidental clicks. The end result is the user is annoyed and you have a bad review heading your way.