It's been a while, and there's been a lot of confusion surrounding this topic of "5 free apps", so here's the final low down:

  • Unlimited number of paid applications
    • This includes updates to said applications
    • A paid application cannot be made free 
  • 5 submissions of free applications
    • Unlimited updates to accepted free apps
    • WARNING: failed submission of free applications will count against the 5 submissions

So let's walk through a scenario

A (for "awesome" which seems to be my word of the last couple of months) signs up for the marketplace, pays his $99 (or equivalent in local currency) and gets approved. He then submits "A's Awesome Paid App" which fails submission. He fixes the problems, resubmits and the app is published. Based on feedback he submits 4 subsequent updates. Up to this point A has paid no extra fees.

A then decides to become philanthropic and submits a free application. The application fails submission - and now A is only left with 4 free submissions. A resubmits and the submission goes through, at which point he starts submitting updates, and has 3 submissions left. No matter how many updates A pushes, they will still have 3 submissions remaining.