chiyo - 6:25 am on Jul 17, 2003 (gmt 0) It is not modifying the code or against google's TOS as far as i understand it.
I would guess the great majority of publishers are using the code in an include, especially those who already have sections of each page where ads are displayed as may be the case with people with large professional sites. Like the others say, an include is read (by robots and readers) only after the whole page is put together server side. It makes it MUCH easier to place and delete code from various ad servers, affiliate programs as you get to know the revenue flow for each.
It is not modifying the code or against google's TOS as far as i understand it.