No ads while using the phone. Just directed searches, most likely. Think about now, when you Google for something. The highest paying comes up first. So you're already participating in some "ads".
No, wrong. Totally wrong. When you search for something and there's an adwords keyword that matches your search, you'll see "sponsored links" clearly marked as such, but the actual search results are NOT paid for. This is actually a huge reason why Google has succeeded where other companies (who did allow pay-for-placement search results, like Overture) have mostly fallen by the wayside. Pay-for-placement = lousy search results.
The real problem with Google is their atrocious attitude towards privacy and data collection. Consider what your Google searches on a daily basis might reveal about you and your life - and then remember that Google is collecting and aggregating this information indefinitely. Now Google is trying to buy Doubleclick which already has a huge database that links real names, addresses, and browsing histories collected from sites that participate in DC's network (a vast chunk of the net).
At least with a web browser you can block Google's cookies. When you buy Google's phone, you'll never be able to keep Google from knowing an absurd amount about you - your real name, your browsing history, the contents of your email and your address book, the numbers of everyone you call, even your physical movements (phone locations are tracked for "enhanced 911 service" - http://en.wikipedia.org/wiki/E911#Wireless_Enhanced_911). The potential for misuse of this information by anyone who as access to it is enormous - and the incentives to misuse this information grow every day.
No thanks. I still use Google's search because their results are unparalleled, but I don't love or trust the company, and I'm not interested in handing over such intimate details of my life in exchange for a shiny gadget.