MC has mentioned that no follow is meant for whenever you don't want to pass on the PR. I think he's said something along these lines a few times but don't want to wade through the blog to find them just now.
I've used it for affiliate links for some time and seem to be doing as well as ever if not a bit better in Google's serps so I don't think it hurt.
On recip links and not getting spidered or listed MC made a couple of comments when he was evaluating some examples that indicated that the recip links neither hurt nor helped. The same with unrelated links. The point he seemed to be making is that you need enough inbound links of value not so much that you are being punished for some questionable links. Read through the comments under the indexing timeline entry and see what you think. That's what I got out of it but would like to hear other's opinions.
I know that feeling and it's a real rush. I hit #3 for my top page a few weeks ago :), now I'm back at my usual #5 :(. It's an emotional thing that has nothing to do with reality. It's the long tail that brings in the greater % of my visitors. But boy does it impress people when you say your site ranks 5th in google for a top keyword.;)