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Bill, I don't have all the answers...wish I did. I'm throwing ideas up for discussion. I'm fairly convinced that there is a penalty that alot of our (meaning that group of sites that all interlink) sites are suffering from. When you look at the back of the index, you'll see alot of pages from most of those sites buried there. If you look at alexa's traffic details, you'll see that alot of those sites all fell about the same time.
Whether it's a penalty, or an algo change, we all need to try to figure it out and try to get out from under it.
My company still has sites/pages that do very well with google. We are trying to be pro-active and working to keep those sites/pages from falling. Of course, we've lost placements too and we're trying to get those back.
My best guess regarding an answer to your question #2 is that our (I'm referring to everyone's sites, not just the ones that we own) little group of 100 or so Link Lists are certainly not the only adult sites on the 'net. We barely scratch the surface. We have, however, all placed well in the past for lots of terms. Linking outside of our network is certainly necessary. Finding sites within this network that have been buried, are not being cached by google, have not been updated by the webmaster for a long period of time, etc and ending link exchanges with these folks is probably not a bad idea.
It's a trial and error thing. We can't just sit still and hope that placements come back. That said, the "Chicken Little" syndrome will not help anyone here. Open discussions, bouncing ideas back and forth, and trying new strategies seem to be what's called for.
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