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I've played by the rules so far but am now asking myself what the hell for.
Only you can answer that, but I would hope it's because you're in it for the long term, and unwilling to put all of your work at risk for a short term boost.
What you're describing is basically a link farm, and will never hold up under a hand check.
Indigojo, they are unrelated sites, so it looks like "artificial linkage".
Sooner or later this will get caught, but I agree with your "It's working for someone". I posted Google this type of spam and it seems to take a long time for them to react.
Well i have posted a spam report now but nothings been done, any ideas on Google time to action this sort of thing.
It could be months. They do read the reports, but rarely intervene by hand.
From Google's Webmaster Guidelines...
Google prefers developing scalable and automated solutions to problems, so we attempt to minimize hand-to-hand spam fighting. The spam reports we receive are used to create scalable algorithms that recognize and block future spam attempts.
