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You can see examples of this if you look at the cached pages in Google's search results. If the kw is present on the pages you'll see
These search terms have been highlighted:
If it's not present on the page then you'll see:
These terms only appear in links pointing to this page:
Keyword density is only a part of Google's algorithm and sometimes not enough to help a page rank well for certain search terms. It seems that off page factors such as anchor text are weighted heavier than some of the on page factors.
For an example of this, do a search for "welcome" without the quotes and look at the cached pages for the top 10 sites.
(not sure who originally posted this example, but thanks!)
Using the Site Search [searchengineworld.com] you can find various threads discussing anchor text, keyword density and proximity that may help you out. Try the following discussions:
Sometimes having a keyword density that is too high can have adverse effects on your ranking. There are varied thoughts as to what is an acceptable kw density, but I'm sure that you'll find some good ideas in the site search results.
Hope you have a great holiday.
Welcome to Webmasterworld, dynastywd.
Another area to look into is your competition, you mentioned a 3kw combo from your site yeilding, however with two, it does not. Worth looking at the differences between the amount of return results from the two and three keyword terms, the difference is important. Also having a look at why the top ranking sites are there and this will become ever more apparent, as you read the threads above.