I know a website that links to my site that has gotten hacked. Ruining my natural backlink from that site too because now that site has been penalized. It also has got me scared too that my website may also eventually get compromised by some of these hackers of which try to pedal illegal pills form india on your site. It really is sickening how these idiots will try to sell pills on your site from india therefore you just know they will be goodness knows what and not medically tested and potentially deadly... Surely dns server should totally block these sites.. and I dont know whether you can report these moron hackers to the police because they are offshore.... These hackers have no morals and I hope that they go to hell and rot.
If you have been hacked check out were the hacked sites are pointing to and use whois to catch the culprit who has done this to your site.
Hacked sites are badly penalized in the search results and will usually gain hundreds of really dodgy link to the bad pages on your site further adding to the search engine penalty.