It does boggle. Pure speculation, but I think the only reason it works is they must charge money for nearly everything (Darth Jerak above notes that people have to pay to chat)... so duped player clicks on ad, signs up for game, pays to chat and for upgrades... realizes he didn't get what what he signed up for, leaves. But by the time this guy's left, two more duped players click the ad, sign up, lather, rinse, repeat. It's an income based entirely on a transient consumer base, but the consumer base is large enough it's still profitable.
I have noticed the ads being less prevalent the last couple months though, at least where I surf. I think they will eventually run out of targets. But you'd think if they were this good at getting people to click on their ads, they might as well do the easy thing and just sell porn.
As an aside, I was looking around on the Web awhile back for something Civ-like to play in my browser... I almost checked this game out UNTIL I saw the ads. So for every one they're getting to click, they're also driving some potential consumers away.
And as a further aside, here's a trick: you want to sell your game with a sexy lady? Fine. But make her look strong, empowered even if she's showing a bit of lovely decolletage. According to various studies on audience reactions, generally (please note that word, of course there are exceptions) men respond to the character on screen that they want to do something TO--statistically most often a pretty woman that either inspires protective or lustful urges (or both). Women respond to the character on screen that they identify WITH--statistically therefore, also women, usually designed in either a sympathetic way or a way that makes them feel better about themselves. So... for gamers would be a pretty woman, but not only one that inspire men, but also make women look at her and say, "Ooh, I want to be her." But you make the woman look like a victim (or generally totally ridiculous from a woman's POV)? You alienate a portion of your potential userbase. (Again, note these are generalizations and of course there will be exceptions.)
