http://www.tutorialized.com/ (This is a very popular tutorial directory site..) See how the ads are blended in so well? Image border and everything, it's hard to believe that it's legal? Is it? (I'm sure they would have been banned by now if it wasn't)
It is allowed but it kind of tricks users into clicking on the ads (which is not very smart since it can get them smartpriced).
Yes it is. It is well blended but the person clearly distinguishes the ads with otehr links by having "sponsored links" written with different colour background.
Yes, you can use a similar design but not the same (I don't think it is correct to copy another person's source code).
It's legitimate, but I find that it's always risky linking text in any way with a Google AdSense ad. I value my revenue too make to take any chances with getting banned.
Good point, it's nice to get the clicks but it's really a huge risk to put your whole account in the balance.