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My practice on links in the right-hand rail is to err on the generous side. I don't "trade" links as such. If its local and I think enough readers might be interested, I'll usually list a site in the interest of completeness, whether it links back or not. That said, I'm tempted to pass on Just Above Sunset. It looks potentially promising, but its page of local links is copied straight from L.A. Observed, right down to the category labels -- and there's no mention of (or link to) L.A.O. itself. (Nah, I'll list it, but geez.)
Update: Editor Alan Pavlik has graciously added a link to L.A. Observed. Thanks.
Meanwhile, scanning the latest Technorati 100 of top blogs, these are the sites that I recognize as located (more or less) in the L.A. area. Technorati ranks not by traffic but on how many other sites link to a blog:
#5 - Boing Boing (co-founder and contributors are local)
#22 - Wil Wheaton
#35 - Little Green Footballs
#44 - Calpundit
#46 - The Volokh Conspiracy (main conspirator is at UCLA)
#75 - The Truth Laid Bear
#83 - Chris Pirillo
E-mail if I left anybody out.