What other advertising do you do besides just flyers? Make sure not to put your eggs into one basket when doing the advertising for new students. Nothing wrong with flyers but if you can advertise in more than one way it will help. Do some online promo in your local area too (like Craigs List and local directories). I recommend keep doing the free lesson. It will help in the long run.

You should check out Tom Hess' site as the poster above me said. I started checking out his free info for guitar teachers a few months ago and after applying some of his suggestions about marketing, I'm doing a lot better this year as far as keeping a consistent number of students. I think there is some stuff on his site that can help you.