This is one of those age-old questions that continually plagues people knew to freelancing (well, new to business in general). Would love to hear your thoughts on it, but will share mine here first.
Put bluntly, no, don’t do it.
But… with some caveats. Understand there’s a difference between a “free initial consultation” (aka sales call) and doing “work” for free. Many of you have probably heard “if you can do this one project for free, think of the exposure you’ll get!” or “we’ll have money coming in and then we can pay you for the next project”. No dice. Life doesn’t work like that. I’ll give someone an hour or two, if there’s sincerity coupled with a good solid idea and some specific areas in which I think I can lend assistance.
I’m saying this not out of lack of experience doing ‘free consulting’, but precisely because I’ve done it. When I initially got taken in (sometimes by hucksters, sometimes by well-meaning but poor-executer people), I was, let’s face it, naive. Not anymore. I routinely turn down offers for free work – at least one per month, sometimes more.
All that said, there are still times I do free consulting. I’m far more discriminating in the projects I take on, and limit my scope of involvement from the outset, and am pretty open with laying down terms – I’ll do XYZ in the next month, no more. If I see the other parties are really hustling and making stuff happen, I can step things up a notch, but that rarely happens. But at least I’m not busting my back over it any more.
Sheesh – just writing it out here makes my sound all bitter and cynical. I’m not – that much, anyway. Probably most of use have our “work for free on this project” war stories – feel free to share some of yours below, and I’ll share mine. 
To keep things light, have a look at http://shouldiworkforfree.com. It will help you make that decision pretty quickly.
And if you’re interested in exploring these ideas and more from professionals who’ve been there, done that, join us at indieconf in November!
The only time I’d do free work is if I had no paid work to do and no ideas for something to do to find paid work.
Time is better spent actively finding paid work than doing free work in hopes of paid work. Someone asking for free work is more likely to ask for more free work.