I think radiohead did it right, and i plan to do something similar myself.
Releasing you album for free with an optional donation system on your website/myspace etc is an excellent idea. It cuts out labels, distributors, shops/downloads sites which means if someone gives you a euro for 12 tracks you get the euro. rather then 12 euro for 12 tracks and you only get 50% of 50% of 50% of 50% or whatever bs. not that you didn't know that already lol