We're about to release our 12th title, and are considering some of the same things. Here are my thoughts based on what's worked for us in the past:

1. For my studio, I've always, always found that other forms of PR work better than banner advertising. Given $500 to spend, I'd rather put that towards creating and distributing targeted press releases, whipping up a nice press package (screenshots, blurbs that journalists can cut-and-paste), and so forth. I feel that the return is much greater.

1b. Those stats are compelling, but I'd take them with a grain of salt. Which ads get 1% click-though? What games are getting those 5% sales? The latter figure seems on the high side. For indie games, a 5% conversion rate for users who actually download play the demo (i.e., 1 in 20 people who download the trial purchase the game) would be exceptional. A 5% conversion rate for users who view the ad (i.e., 1 in 20 people who merely click on the banner end up purchasing the game) seems absolutely phenomenal.

2. Getting your word out to the "indie community" is a nice way to generate buzz, but I feel that the number of people who care about "indie-developed" games (or even recognize such a distinction) is small compared to the gaming world at large. A vast majority of our game sales have come from people who have never heard the term "indie." However, there are indirect benefits to courting the community, such as increased exposure elsewhere, and the attention of journalists/publishers who pay attention to that.

3. I've had limited experience here, so I can't say much.

4. Our press releases have always resulted in a greater return on investment over our graphical banners and Google text ads. Your mileage may vary.

For some thoughts on advertising, run down to your library and snag a copy of Seth Godin's Free Prize Inside. Best of luck with your launch!