Links Spam
Links are another major SEO tool and like the other SEO tools it can be used or misused. While backlinks are certainly important (for Yahoo backlinks are important as quantity, while for Google it is more important what sites backlinks come from), getting tons of backlinks from a link farm or a blacklisted site is begging to be penalized. Also, if outbound links (links from your site to other sites) considerably outnumber your inbound links (links from other sites to your site), then you have put too much effort in creating useless links because this will not improve your ranking. You can use the Domain Stats Tool to see the number of backlinks (inbound links) to your site and the Site Link Analyzer to see how many outbound links you have.
Using keywords in links (the anchor text), domain names, folder and file names does boost your search engine rankings but again, the precise measure is the boundary between topping the search results and being kicked out of them. For instance, if you are optimizing for the keyword "cat", which is a frequently chosen keyword and as with all popular keywords and phrases, competition is fierce, you might not see other alternative for reaching the top but getting a domain name like
http://www.cat-cats-kittens-kitty.com, which no doubt is packed with keywords to the maximum but is first – difficult to remember, and second – if the contents does not correspond to the plenitude of cats in the domain name, you will never top the search results.
Although file and folder names are less important than domain names, now and then (but definitely not all the time) you can include "cat" (and synonyms) in them and in the anchor text of the links. This counts well, provided that anchors are not artificially stuffed (for instance if you use "cat_cats_kitten" as anchor for internal site links this anchor certainly is stuffed). While you have no control over third sides that link to you and use anchors that you don't like, it is up to you to perform periodic checks what anchors do other sites use to link to you. A handy tool for this task is the Backlink Anchor Text Analysis, where you enter the URL and get a listing of the sites that link to you and the anchor text they use.
Finally, to Google and the other search engines it makes no difference if a site is intentionally over-optimized to cheat them or over-optimization is the result of good intentions, so no matter what your motives are, always try to keep to reasonable practices and remember that do not overstep the line.
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Medianet SEO discussion: Optimizing Flash Sites