Verne Kopytoff summarizes recent disclosures regarding google’s popular adsense advertising program:

Google is among the Internet’s biggest destinations for advertisers. The company had nearly $1.5 billion in revenue last year, 95 percent of which came from advertising.
Targeting the pitches
Underpinning Google’s business is AdWords, a program that allows advertisers to make targeted sales pitches alongside search results. For example, a shampoo company could choose to advertise for queries that only include the words “hair,” “dandruff” or “split ends.”
Google also runs the ads on partner Web sites including America Online, Ask Jeeves and Earthlink.