In my experience with Japanese, using flashcards for kanji doesn't really help with long-term memory acquisition.
I agree with your latter point about context; it's better to find an unknown word in a sentence and look up its meaning, then you tend to remember the word longer b/c you understand how it's used.
My method for learning kanji was to count the strokes (it's relatively simple to figure the stroke count for any character: http://infohost.nmt.edu/~armiller/japanese/strokeorder.htm) then use that number to look them up in a dictionary.
But everything I looked up was in the context of a sentence, while trying to read a report at work, e.g.
IMHO the difference in the quality of learning varies greatly across the paper flashcard/supermemo-ish software continuum.
I just found it better to try to read the reports and memos being passed around at the office, and once I looked up kanji I didn't know, I would tend to remember them, since I'd read them in the context of a sentence.