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1. Keeps the redirect URL in the index but indexes the redirected content.
2. Drops the redirect URL but indexes and adds the redirected URL and content.
Situation 1 usually happens when pages are redirected to a long dynamic page. Situation 2 usually happens on static type pages. I have a lot of incoming links to pages that at one time had content but are now just redirects to the correct page. And if you do a backward link search for the new pages it shows pages that link to the new page and to the redirect page.
I think google does a great job of dealing with redirects IMO.