For the last couple of years article marketing has formed part of my launch campaign for any new simple affiliate/adsense sites. For many of the sites (especially ones designed for niche markets) article marketing and directory submission would be the only inbound link generation work I would do - if it is enough to get you to the top, why do any more?
Article marketing is a pretty simple idea (all the best ones are), you produce an article (usually 400 words plus) and give it away for webmasters to reprint on their websites, or use in emails to their mailing list. The webmaster is required to include a link back to your website at the end of the article, which results in traffic from readers clicking through, and (more importantly) a PR boost from all the backlinks you acquire.
The traffic I have received from the hundreds (thousands?) of articles I have published in this way has been negligible apart from when the article has been re-published by a spammer. The PR has always been the greatest advantage.
Many marketers submit by hand to the larger (older, higher PR, higher traffic) article directories such as ezinearticles.com, and then use client side software to shoot out articles to the lower orders. I personally use articlemarketer.com exclusively, and have never hand-submitted (following the 80/20 rule: I’m happy to get 80% of the results if I only have to put in 20% of the work).
The trick with article marketing if you are looking for traffic from clickthroughs is always to write a high quality but ‘incomplete’ article, leaving your readers wanting more. The reader is then more likely to click through the link at the foot of the article to your site. The problem with this is you either need to be good at writing, or hire a good writer. For me both of these options were too expensive to give me the value I needed, so I concentrated on buying cheap articles ($5 should get you a readable 400 word article from places like rentacoder & elance if you buy in bulk). Providing the article is on-topic, written about the niche of the site you are promoting, and fairly readable, you can expect it to appear on tens to hundreds of websites within a week of publication. The distribution of the article will continue indefinitely, building links over time, which is a nice added bonus.
Of course, many webmasters have been using article marketing to promote their websites, and a niche business has grown in providing article distribution sites. There are hundreds of ezine/article sites to submit to now, and many thousand websites reprinting the content. As with any technique that can be used to artificially boost your websites status in the eyes of the search engines, the search algorithms have been tweaked to weed out these articles and sites, and reduce the PR that the create and pass. Work has been done on combating duplicate content, and many article repositories do not seem to have value any more as far a link juice is concerned.
In conclusion, article marketing still has its place within the world of SEO, but in most cases money and energy can be better spent elsewhere.