An article in the Wall Street Journal today discussed the increasing prevalence of "widgets" in marketing. More and more mainstream companies are turning to the small, embeddable, interactive tools as advertising media for their products. The article mentioned the web site for the upcoming film The Golden Compass, which allows users to create their own "daemon" (an animal spirit from the film/book) and post it on their blog or social networking profile.
As with all advertising, it isn't a sure thing. The film Hoot apparently had a downloadable owl that would float around a user's desktop (sounds pretty annoying to me), but the film was a box office failure.
Social networking sites that run traditional banner ads on users' profiles are understandably concerned with the onset of widgets, because they are out of the advertising loop. Traditional banner ads pay to the web site, but the advertisers behind widgets pay to the widget's designer. (The designer, therefore, must make the widget creative enough to appeal to users and make them want to put it on their profile.) From MySpace's ToS:
MySpace.com reserves the right, in its sole discretion, to reject, refuse to post or remove any posting... [such as] commercial endeavors except those that are specifically endorsed or approved by MySpace.com
In layman's terms, MySpace can remove widgets from your profile on their site.
The idea behind widgets, while not necessarily new (affiliate codes and embeddable HTML have been around as long as the web itself), associates with the much-hated buzzword "Web 2.0". The social aspect often allows for personalization, and end-users must choose to place the widget along with the assumedly related content on their profile. These end-users dislike banner ads for the same reason: they can't choose the content of such forced ads.
A couple friends of mine are involved in a "top-secret" venture at the moment, making widgets for use on social networking sites such as MySpace. They're working with an industry veteran, who has started successful online businesses in the past, selling them for millions. His former ventures were in the online auction industry, but he's a businessman and long-time Internet user above all else. They're in the process of securing VC funding, and are programming using ActionScript and Flash for their widget designs. It's still in the early stages of development, so I can't give a link or name.
I myself designed a set of widgets (again, still "beta") for counting down various school-related events. There's no ad revenue involved, just a link back to the homepage. This particular one counts the days until I return to school:

Article: Steel, Emily. "Young Surfers Spurn Banner Ads, Embrace 'Widgets'." Wall Street Journal 02 July 2007: B3. (sorry, no URL-- the Journal's web site is a paid subscription service)