Now my question to all readers: am I crazy in continuing with DBing?
DB'ing will help you whether you reconcile or not, so it's always a good idea to follow DB principals.
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Do I allow cake-eating by accepting being "friends" for now?
That's not cake-eating, cake-eating would be if she were living with you in a more typical husband-wife relationship while also carrying on with OM. In your case you're separated and she's living elsewhere with OM, so that's not cake-eating whether the two of you are friends or not. I think you should foster a friendly relationship with her regardless, because the two of you will always be co-parents.
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As Michelle has written in DR most people around me advocate a divorce. But I still think I am the "better choice", in fact better than ever. The kids are yearning for a reconciliation. But how to do a 180 on her core point of "not reaching her soul"?
Her comment sounds like a twist on the old "I love you but I'm not in love with you" line. Basically all you can do is work on yourself, do 180's on your faults and make yourself the spouse only a fool would leave. It sounds like you've already done a lot of work in that regard, so just keep it up.
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Probably listening to her carefully is all I can do.
That's not all you can do, but it's certainly a great thing to do. Listen without fixing. Validate her emotions.
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How to increase my physical attractiveness? I have already lost 30 pounds.
Good! Other things- whiten your teeth, get your hair done differently, wear cologne (or new cologne if you already do), change your wardrobe. The idea is to make her wonder what you're up to, and also to make you feel better about yourself.