Michael, yes this happens all the time. I usually contact their host, the affiliate program they are using and their domain registrar and send them proof of the theft plus a legal-looking statement requesting they shut the webmaster down, and I cc it to the webmaster too. Plus I try to contact the place where I bought the content to tell them about the site that is using it illegally. It has worked in the past, I have managed to get peoples affiliate and hosting accounts shut

As for keeping your own affiliate code in the banners/links - you have to watch these guys - the reason they do this is to get a copied gallery accepted at TGPs or linklists then they redirect the traffic to an aggressive dialer or sometimes to some illegal sites! That in turn will give YOU a bad name. I always contact TGP or linklist owners too, with proof, and ask them to remove the gallery and blacklist the domain too!

cheers,
Luke