We were very early to the market with the very first free word game - it was free game number 180 or so. It was initially released as a paid game and its performance was horrible - as with about 99.9 percent of the non XBLA paid games.
After making it free I never looked back. Two of our three games made it to the top 10 list for an extended period of time. We're one year in now and I can honestly say, if you are a 1-2 man indie shop, you could easily deploy to WP7 full time - only if you make good games that get in the top 10. Otherwise, WP7 revenue for ads in games just wont scale beyond that - at least not right now.
It's that "right now" that is intruiging. We here at AAWP agree with Miles - if Microsoft add In App Purchasing there's much more chance of the second and third tier games (ie the ones not graced with an Xbox Live tag) making a solid return from their code. As always... "show them the money."