Whitey - 7:01 am on Feb 7, 2010 (gmt 0)
I think you're ranking well because search believes you when you say the page is about red widgets, not because of the link but because A) the page text is about red widgets and B) your index page has the highest value on that domain which beats out other sites inner pages.
It could be. Added to this , Google want's to strengthen the context of a page [ per the recent breadcrumb / snippet focus ] with better signals, and this may well be partly achieved by demonstrating a link heirarchy that loops back - it may have for a long time .
If the links are overdone , Google may see this as an abuse of context which may not pass their algo or a manual review. So apply it with " appropriateness " . Don't ask me the limits of this - maybe just do what Silvery suggests.
That's my take on it.