Wow I nearly lost an afternoon catching up on most of this thread.
There really could be two issues here;
1. Issues with the Adwords campaigns
2. The issue with the website itself
3. A combination of the two
It is extremely easy to generate a lot of traffic via Adwords. The key is to generating traffic which is converting at a higher rate than your competitors....thus making you competitive.
If your traffic volume is very (comparable to spend), it could be that you are generating the wrong traffic. For example.....it would be easy to generate a lot of traffic for the keyword "free websites"..... but if your websites are not free, it would likely convert at an extremely low rate.
If your Ads are highly relevant and targeted to the correct pages, then the issue will be down to the user's perspective of your offering. For example;
- Too expensive
- Not enough information
- Not strong enough calls to actions
- Technical bugs
The bottom line is, the conversion rate of your campaigns will dictate it's success. If your competitors convert at 5%, and you convert at 1%, it means you are going to have to generate 5 times more traffic (and probably spend five times more than them) in order to compete on a level playing field.
Without digging into your Analytics and Adwords, nobody is going to be able to tell you exactly what the problem is, or what combination of things are causing the high traffic/low conversions. In order to dig properly, you will need a relatively decent volume of traffic to analyse.
My advice would be to pay a few hours of consultancy to an expert and have them dig into your site, dig into your Adwords, and produce a findings report.