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Basically, it's a directory that is automatically built from recipricol links, and the software creates it for you, etc. Spiffy, but dangerous stuff.
It crawls the web and finds sites matching your criteria, then can generate a directory comprised of those sites for you to upload to your site.
The problems with Zeus have been happening for a while, but I generally see the problems happen with sites that use the default settings and page names.
Sites that change the default page names and customize the directory look seem to not have many problems (though I haven't been following this for a while).
Much of the problem with Zeus, as with lots of programs, stems from people using the default settings (anyone remember the blueline graphic from the old WPG?).
I've used Zeus successfully in the past without any problems, but I always customized everything (that being said...I only use it to find sites now, the emailing and building of the links pages are done by hand just to be safe).
The issue is "how" the tool generates the sites to approach for exchanging links, my understanding is some do Search Engine queries (which google frowns upon from a resources perspective) and some crawl the web themselves which shouldn't bother google, from a resources standpoint.
Zeus also offers on their site a "collective" where you can enter a phrase and look for related sites that exchange links.
I did quite a bit of checking the other day and did NOT see many sites using Zeus that appeared to have been banned for using it ...but as philosopher suggests maybe using it as an identification tool only makes the most sense