tedster - 1:00 pm on Jun 25, 2012 (gmt 0)

Are you referring to exact matches between the anchor text of the internal link on a page and the title tag of the page being linked to?

Yes

When search engines look at the "surrounding text" of anchor text in an internal link, are they looking at some of the words before and after it, a couple of the sentences before and after it or maybe the whole paragraph to see if the link fits within the context of the paragraph?

All of that is possible - so is the title tag of the linking page! It's just one of MANY small details that do get noticed by search engines - and they're always looking for correlations they can use.

If you overdo it and try to "SEO" every small detail, then you might well trigger a Penguin demotion. If you want to rank well today, I'd think a lot more about old school marketing to directly attract more visitors and less about these technical details.