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Joe's Red Widgets links to mysite.com/red-widgets.html
Assuming the incoming link is of sufficient quality, this procedure has the effect of boosting the relevancy and PR of the target page, and seems to benefit the site as a whole.
[edited by: startup at 12:55 am (utc) on Sep. 25, 2002]
1. Make sure the target site isn't PR0, you don't want to link to a site which Google has penalized.
2. Is that other site a competitor? If so, you want them to link to you, but you don't want to provide as much benefit to them, do you? So link to them from a low PR page leaving keywords out of the anchor text, or put all your links on a links page that has a "nofollow" Meta tag in place.
3. Hope they don't know what you just did. ;)