Om Malik posted an interesting piece earlier this week about the growing market of ad-supported software on the iPhone -- due to the strange economies of the App Store (which are still developing), lots of app makers have found the prices on their apps driven way down, as most buyers are pretty wallet-shy when it comes to picking up even quality apps from the store. But as Malik notes, putting ads in the software allows these devs to still get some cash out of their products (and most consumers aren't fazed: Twitterrific, one of the most popular apps on the Store, has had ads in the free version since day one).
Unfortunately, Malik doesn't mention the one problem that Apple didn't think to fix in the first release of the App Store -- trial versions. One of the reasons consumers are blanching at the more costly apps is that they have no options to try them out first, and when people are offered a choice of free unknown versus a paid unknown, they'll always take the free option. If Apple could come up with a way to let users try before they buy (some developers, including iconfactory, have created two different versions of their own apps, which people can then upgrade to if they like the app), I'm guessing you'd see more people pay for the more quality apps in the store.
But even if not, Malik seems right (though even he admits we're all flying blind here, on only a month's worth of data and anecdotes). If the only app you can sell in the App Store is a free one, ads aren't a bad way to make up as much of the dev costs as you can.