After the initial post on the subject, I found BlogAds.com.  They sell ads on blogs. They don't appear to be doing good business though.  Here are some observations:

Money – blogers using BlogAds.com service supposedly make $20 per month on the average and as much as $150 per month.  This is just not enough to be attractive.  At this level, its better to offer gift certificates.  Receiving a $100 gift certificate for Sharper Image (for guys) or Crate & Barrel (for gals) every few months would be more attractive than measly $20 per month.  Receiving small amounts of cash every month could encourage pathetic pleas asking for readers to click on ads.  Not good.

Style – not all ads will work for blogs.  They need to be done tastefully.  When was the last time you saw animation in blogspace?  No color clashes also.  Ads for blogs must blend in with predictable position and size.  Each blogger must be able to decide the what kind of ads they are is willing to display.

Effortless – most importantly, it must be effortless with no big change to the blogging routine.  Approving an ad request should take only a single click.

All this requires a lot of work for the blogad service and deep integration with blogging tools.  But one can't expect all the blogging tools to support ads and do it consistently.  Also, one reader noted that MT blogs can't have ads because ads will violate the non-commercial license.  Solution seems to be free ad-enabled blogging tools and services that compete with existing crop of blogging tools and services.  Why pay for it when you can get it for free and receive occasional rewards as well?