Here is a pretty good posting on the the pros and cons of using custom Site Definitions in WSS3/MOSS 2007.
I had always thought that Site Definitions were the correct way to deploy site level customizations (as opposed to using Site Templates). I began to question that, however, when I heard (from a Microsoft employee working with SharePoint, no less) that custom Site Definitions were being phased out in the next version (Office 14, or whatever). I have not been able to find any confirmation of this, however.
FredSpace 