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Hell yeah, advertising works wonders. The incredibly popular NeoPets game uses a variety of advertisements to make money.

Often they have various real life products for sale within the game world, that people can use. They also offer people game money for opting in to get tons of spam. Visit Cartoon Network, here's a hundred units of currency. Sign up for this new auction site, here's some new attack for your little pet. Nominate someone to run the Olympic torch for Coke, and here's some new Coke machine for your NeoHome. They've managed to create quite an inventive and cool game, despite the kiddie slant given to everything, and it's still entirely free. Millions of people play it, and they've managed to employ quite a few artists and coders off the advertising revenue and sales of shirts and the like.

A few years ago, the online game I help administrate was looking to go to a pay-for-play system. They had to scour through the database, removing references to various copyrights. They had to work out payment systems, worry about players actually being paying customers that they had an obligation to help, and various other worries. In the end, the administration at the time decided that it wasn't worth the hassle, and the game continues to remain free yet small to this day. We advertise the people who founded the game, who also provide bandwidth and the server space, but no money's moving around the game whatsoever except for a few donations from the players to the providers. Every few years, talk of it going to a pay format or being sold is kicked around, but I don't think that'll ever happen.