Financial terms of the deal were not disclosed. But it includes some of the most coveted titles in gaming, such as the popular Madden football, NASCAR, Tiger Woods golf, NHL hockey and an upcoming skateboarding title. Parks Associates estimates that the in-game ad market will be worth more than $600 million in three years, up from $120 million last year.

I edited a piece for the July issue of Business 2.0 that declared that this is likely to be a breakout year for in-game advertising, and that’s turning out to be true. Excerpts from that story:

… In-game ads have come a long way since then, and this could be their breakout year. Internet-ready machines like Sony’s (SNE) PlayStation 3, Nintendo’s Wii, and Microsoft’s Xbox 360 are selling at a rate of more than 500,000 a month; by year’s end 8 million consoles could be plugged into the Net.

And because the devices are online, advertisers have enormous flexibility in terms of what they’re pitching and how they do it. … The terrain of a console connected to the Internet is as ad-friendly as a webpage; pitches placed there can be updated to reflect a company’s latest branding campaign, targeted for certain geographic areas, or tracked to see where and how often players pause for a closer look.

As noted above, the part of this deal that some might initially overlook is the online component. Microsoft’s in-game advertising unit, called Massive, doesn’t make static ads for game makers to plop into their landscapes; it makes dynamic ads that Internet-connected games can dynamically display. Sports titles are particularly suited to this type of advertising, since product placement is so prevalent in sports these days. Rather than being a distraction from game play, ads in sports titles, when done correctly, can make the action seem more realistic.

There has been a lot of action in this space lately. Earlier this month, Massive rival IGA raised $25 million from sources including Intel Capital for the build-out of its online ad network. Google (GOOG) earlier this year bought in-game ad startup Adscape Media for $23 million.

But there will also be challenges ahead. As I noted yesterday, a recent study shows that gamers are more likely to notice ads that are close to the action – and that could put pressure on game makers to sacrifice the purity of game play to make an extra buck from advertising. The masses have already proven willing to mount a backlash against such moves. Again, from our Business 2.0 piece:

The billboards in Battlefield 2142 and Counter-Strike prompted customer rebellion in recent months when players felt they sullied gameplay. Fans posted angry messages on forums, along with tips on how to disable the ads. And research by Parks Associates shows that some gamers still aren’t convinced that ads won’t spoil the fun.

One also wonders whether new EA Sports chief Peter Moore, who left a gaming job at Microsoft just last week, had anything to do with helping to seal this deal. Whether he did or not, he’s sure to play a part in making sure it works.