good points...

[ElizabethReynolds]

In true newbie fashion, this is suposed to be a reply to "Site #1 in Free SERP and sitll using adwords, makes sense?"
Good points, I'm a new kid so maybe lots of people do this, but we use parameters on all our destination URL's to track conversions through paid and natural searches. eventually i'm hoping to optimize well enough to phase out some of our expensive keywords.

[Robsp]

When you measure you know what is going on.

What I miss in all these "should we be on both sides" discussions is not on which position you are but what your proposition is. In a good campaign different propositions are tested and your Nr 1 in the SERP's can (and probably should) have a quite different proposition, drawing other prospects.

Adwords is about marketing after all....

[mike_ppc]

What is more important is that AdWords is customizable.

SERPs are not changeable, and they may reflect (or not) the true nature of your site. So you can use Adwords as a supplement - regarding messages (text) or keywords, URLs, etc.