Hey I run a photo sharing site as well -
http://Simplebucket.com and so here's my response from my experience.
1. How do you folks attract new members ?
Mostly from google search. When I started Simplebucket, I had the concept of making the simplest photo hosting, no registration, no login. And so I targeted the words "simple photo hosting" and now Simplebucket is #1 on google for those keywords. When we first launched, after RailsRumble 2007, the site had bare functionality and minimalistic design. I redesigned and added features to Simplebucket and relaunched in 2008. After the relaunch, I emailed blogs that wrote about photo sharing sites and tell them what is unique about simplebucket.
2. How often (if at all) do you interact with your members?
Not a whole lot and I know now that it was a huge mistake. I kind of neglected our community due to job commitment. Photo sharing is about building a community and interaction should be first, I was also too focused on features which I think should be secondary to building a community.
3. I recently tried to monetize my site with some ads. I regret doing this, it wasn't my idea, a friend recommended I try... it was a bad idea. But how do you folks monetize your sites ?
I'm not sure why ads turned out bad for you, but for me, it went neither way. There isn't a whole lot of ad revenue, enough to cover hosting cost in certain months but that was it. I did not receive any complaints from existing users so my perception was they are fine with it.
4. Should I Keep Going? With all the other photo sharing sites like google,flickr etc. Is it worth it for me to keep working on this ? Maybe I should focus my efforts on a niche? (now what niche do I focus on?)
I went through this same dilemma a year ago. Simplebucket wasn't growing like I had expected. It was very utilized by a small group of fans and I had decided to keep it going for them. Photo sharing is a very competitive arena, if that's one thing that I learned from the past year. In order to emerge from the noise, I knew from the start that the service had to provide something unique and niche. Simplicity was mine. I also thought about photos for Twitter in 2008 but did not implement that because I had too much on my plate from my day job. And look at Twitpic now and how several other photo sharing sites are going Twitter in 2009. So yes, going niche is necessary, but it does not guaranteed success.