<ProSEDS News Release
NASA News Release

Check out this pdf...

http://std.msfc.nasa.gov/news/Tether_propulsion.pdf

Quote:

"Flight demonstration of an electrodynamic tether propulsion system is scheduled for June 2002. The Propulsive Small Expendable Deployer System, or ProSEDS, will fly aboard a Delta II rocket launched from Kennedy Space Center, Fla. Once in orbit, the ProSEDS experiment will demonstrate an electrodynamic tether’s ability to generate significant thrust in space by decreasing the orbit of the Delta II second stage."

Any idea if this was actually launched?

If you want to go further and use tethers to launch payloads then something along the lines of HASTOL would be needed... however counteracting the momentum transfer of launching payloads would require a quasi-ProSEDS propulsion system powered by a ~4 billion watt nuclear powerplant. Theoretically possible, but not really practical. There are lots of other problems to solve too.

Once you have such a system however, then you can really build something, something WAY BEYOND a tiny space station like the ISS.