We rank well for about 7 key terms. I started applying AdWords to those specific terms. I have seen an increase of click throughs but not an increase in conversions. Is this effective?
Yes, but mainly for AOL - where paid listings appear on top of normal listings. It really pays off there - especially.
I do it for some terms but not for all. For example, if I'm at #4 (organic), I might try to place in the top 3 for adwords. Just because sites like AOL only display the first few organic results above the fold. Also, many of my keywords are now displaying FOUR adwords results in the top "premium" positions. But it totally depends on the ROI. Just run some tests (which it sounds like you are) and make your decisions based on the results.