After alot of playing around I finally got this nice blending and it works out quite well until my partner saw it and raised the issue that it might violate with Google Adsense Guideline. please let me know what you think. Thanks
Not a problem. There are thousands of publishers blend their link units in this way. This can surely increase the CTR.
I think you need to be careful due to the new guideline: 1. Ads shouldn't be placed under a title or section heading in a way that implies that the ads are not ads. 2. Ads should be easily distinguishable from surrounding content. http://adsense.blogspot.com/2008/03/another-look-at-optimizations.html
Im not so sure on this, if it can look like its trying to look like the navigation will it be ok, would you be ok losing your account over this? Maybe worth changing. They gave an example of this not long ago and suggested against it.