Alright, one thing is clear: Over the past couple of years, I mingled with the wrong set of people.
My friendly competitors have been following this move, and no wonder most of these sites were hit by Panda. Thus, my site was caught in the net.
I wholeheartedly agree with all of you that trusted links shouldn't be slammed with nofollow links. The fact is, this whole show revolves around me -- it's a one-man's show, after all -- and the site "was" sailing smoothly, so I never assumed nofollowing external links was a bad move.
So here's what I did today:
I wasted... wait... I "invested" the whole day in removing nofollow links from my main site. There were 736 links, and each one of them is free from the nofollow attribute. I feel like Harry Potter reworking on his older movies. This time, however, I'm acting not to convince the audience but to please Emma Watson (Google) to marry me.
Now that changes have been made, it should take at least a few days to see if the site climbs up in the SERPs. Also, thanks for the genuine help everyone.
Also, deadsea has an interesting point: linking to a competitor. I'm totally gonna do this, not just for the heck of it but link to competitive sites whenever it's relevant. Man, this is why I love this profession: it's a never-ending learning curve.
Edit: Someone had to do it. And it was Chrisv1963 who had me contemplating. He says this:
Most links on my pandalized site are dofollow
Most links on my non-pandalized site are nofollow