Yes, the free version mean you get ads but they are not as frequent as commercial radio. You just build your own playlists same as your MP3/ipod but you have access to nearly unlimited music. You can also browse and play other peoples playlists if they choose to share them.
For £10 a month you get the ad free version and the mobile version. The mobile version also allows you to download selected tracks so if you are going somewhere without a mobile signal e.g. the london underground you can still keep listening. Any downloaded tracks are erased after 30 days. Some peope are saying it will kill itunes, only time will tell.