I think that there are problems with your site and Googles spidering of it, since out of 81 of your pages in the google index only two have been spidered, with the others listing as a link only. This will be having an effect on our rankings also.
The fact that you have more than 150 inbound links, many from PR5 and higher pages, yet google shows no inbound links makes me think that perhaps you might have been penalized despite the fact that you still show a TPR5 on your home page. Especially if you know that you linked to a bad page.
To get back to your original question, Google has lots of pages in its index that violate their guidelines, despite the fact that they are aware of these pages and their transgressions. I personally think its a matter of trying to eliminate spam with the algo and not having the resources to do it. I also believe that a page has to commit a very severe transgression (so long as search results that return that page are relevant) before Google takes manual action against it. I have seen instances of pages being penalized for linking to bad neighborhoods, but am not at all certain that the penalties were done by the normal algo or by one of their periodic "spam Sweeps"
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