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He's doing you a favour, even if he thinks he isn't. You've just got a free link from his homepage (hope he has nice PR).
The fact that he's done it with an invisible gif might get his hand smacked, but it won't hurt you (other than if he gets penalised he won't have PR to pass on to you).
The important thing here is that you don't link back to him. Google has stated that webmasters won't be penalised for things beyond their control (like him placing this link), so just don't link back and you'll be fine.
Now if the site is still there in two months and nothing as happen you come here and tell how great the new ALGO was NOT.
DaveN
Like Deejay said, don't worry about it too much.
In fact, be happy!
Your competitor clearly has some knowledge of SEO or he wouldn't have linked to you - but obviously what he thinks he knows is wrong - should make easy game for you to prey on! :)
Scott
There is method to the madness.
Outbound links are slowly getting to be as important as inbound links i think for various reasons. Takagi has identified two direct reasons, and my feeling is that is the thin edge of the wedge of an increasingly signficant part of their algo. Theming coming up? Ranking sites on how "smart" their external linkages are?
<a href="http://www.xxxxxxx.xx.uk/"><img src="Graphics/link.gif" width="1" height="1" border="0"></a>
There is also invisible text on the page.
He may well be trying to establish a 'theme' by linking to Scottish sites or sites that somehow relate to some of his other sites.
Along with the points regarding hub score and Similar Pages made by takagi he is trying to prevent a 'community' of interlinking sites by throwing in other links, such as my own and jardinec's. This disguises the heavy interlinking of his own sites.
[edited by: Oyster at 3:16 pm (utc) on April 30, 2003]
If you were to have several hundred backlinks that would be a full time job just monitoring them. I see many sites that have a links page with hundreds of links on them.