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1. Currently the adsense ads are picking up on the smurf content. What is best to target in terms of conversions? Ads for other proxies?
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Well the main reason most users come to your site is to bypass filters (we hope :P) so other proxy related content in theory should convert better.
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2. Are the adds below the address bar on proxified pages showing up okay for everyone?
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Yeh, 2 468x60 adbrite blocks for me.
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3. Is replacing adds in proxified pages with your own possible/ethical/legal?
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It is possible, but unethical. For that reason solely, I won't give you the logic behind a code to do that.
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4. What is the life expectancy of a proxy?
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They last from anywhere from a few weeks (for popular ones) to a few months for the slower ones.
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5. What ways do administrators find proxies to add to their blacklist?
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They'd be using the main baskets such as Proxy.org to quickly ban them. They would also monitor their traffic (if they are good admins) and see your proxy in there often and just block the IP/Domain.
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6. Do admins tend to block by address or by IP?
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Most by domain - first hand experience.
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7. I notice a strong tendency towards having the input form below the fold. Is this the best strategy - hitting them with a page full of advertising?
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Lots of adverts tend to annoy the end user, however it is better for your revenue.
You would need to experiment with this over time for your particular audience.
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8. Anything else I should know to give my proxies the best chance of success?
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Keep costs low, profits high. Your audience brings you money, so keep them in mind.