Can you take a look at this WP Template and see if it's against the new ToS If you look closely, there's a Adsense ad under a blog title. Is that bad?
YES. Please read the terms & guidelines for adsense. That will get your ads removed (if you're lucky) or you banned from adsense.
As I can recall, this was offered only as an optimization tip by google. Which means it is not mandatory. http://adsense.blogspot.com/2008/03/another-look-at-optimizations.html Or am I wrong?
Nope, it's not an optimization tip, it's against the rules "Ads shouldn't be placed under a title or section heading in a way that implies that the ads are not ads." That screenshot that the OP posted is definitely against Adsense's policies.
It's an older theme that has not to my knowledge been updated for Wordpress 2.7+ But you can still use it. Just because the links unit may not be in compliance doesn't mean you have to use the links unit. But I don't see it as a violation as it clearly says that these are Adsense Ads and the link units require 2 clicks to make anything. You can always run it by Adsense for clarification, but that could be a long process. I see this as a borderline thing, but if you care about your account better safe than sorry.
Instead of having that ads unit below the post title, you can move that to the top of the post title. Then it will be in compliance with Google AdSense TOS.
I've read that this theme has too many blocks of ads to comply with the Ts & Cs of Adsense (The maximum being three per page?).
I want to know if the offending ad is the link unit under the main blog title or is it the ad under the Accessories for iPod ear phones blog title. Excuse my ignorance but still learning