Is there still money in free hosting?

No. (This assumes you have a few sites to experiment with)

Redirect your existing 404 traffic to some sponsors and then do the math. Assume that is your only income.

If you have some trick up your sleeve that does work, however, keep it under your hat and run with it.

I think putting a banner on top and/or bottom, is not unfair.

With fair i ment not redirecting traffic from submitters. I wouldn't put up the banner because alot of TGP/MGPs don't like them.

Agreed up to the point i wouldn't send the 404 traffic directly to sponsors, i would use landing pages, i'm testing some landing pages as we speak...... i'm a marketing guru

hosting got too cheap this days for free hosting to be worth it.

i'm sure many people still look for free hosting for various purposes...

From experience, I woul say no.

Keep in mind that total traffic and error traffic increased, and hosting costs decreased... my three years of running a freehost went like this:

First year - nice profit
Second year - broke even
Third year - actually lost money

Freehosts were, and probably still are, cheater magnets. You'll get spam complaints, C&D letters up the ass because people will use stolen content, pedos spreading their garbage, Japanese warez fiends hammering your box and everything else you can think of.

Kill the cheaters accoun't, get attacked for it. Redirect crap countries, get banned at the only TGPs and LLs that have any traffic...

The 404 traffic can still be valuable, regardless of what others may think... but once a freehost starts doing 1/4 million pages views or so, babysitting it can become a full time job. blah.

If you want to attract "real" webmasters, you'll have to offer subdomains at a minimum, domain hosting preferable. If this is the sort of customer you want, you will HAVE to use header and / or footer ads.

If the error traffic is your goal, you actually want cheaters. Huh? That's right, you want cheaters and you want them to build up some traffic before you pull the plug on them and redirect the shit.

404 traffic is the only real way to make money with a freehost - "honestly" getting enough of it to pay for things is the tricky part.

try to start an image host like imageshack etc

I have been thinking about that but still working on things like marketing for it.
Find a way to make bling from the uploaders movies/pics. I don't think opening a host to let uploaders hotlink their pictures/movies will have a turn around for myself.

You have some good points here up to the error traffic being cheater traffic. I'm with you if you are talking about automatic signup free hosts. That is not my idea though, i would have webmasters fill in a form and approve or deny them. I would look at things like email addy not being any hotmail like addy. I would also ask for sponsor info and have a script that only allows their ref link out to the sponsor and maybe 3 links for TGP/MGP buttons/textlinks. Deny JAVA, pop-ups, exits, etc...... I would indeed work with several domains with subdomains. Combine all those things and i'm not saying i would be "cheater free" but it would help alot.
Appart from that not all error traffic is cheater traffic........ that's a bit small minded IMHO.