It seems likely that search engines - Google in particular - regard some links as more valuable than others. And it seems very likely to me that search engines - Google in particular - will, over time, tighten up how they regard links. Because search engines keep their techniques secret, the following practices may already be in use or could be soon:
Links inside paragraphs of text are likely regarded as more valuable than link in a large lists or links set apart from text.
Search engines could compare incoming links with outgoing links, and denying or site if it appears to do a lot of reciprocal linking from link pages
Links pointing to a page inside a site might be valued more highly than links to the home page.
Outgoing links concentrated on a few pages might be valued less than links spread around the site.
When site owners figured out that links were valuable, they started playing tricks to boost incoming links to their sites. Some tricks were so egregious that search engines decided they were unacceptable. The trick you hear about most often is the link farm, an automated system that allows site owners to> very quickly create thousands of incoming links by joining with thousands of other site owners to exchange links. Another trick is to create multiple shadow domains or satellite sites - small, well-optimized Web sites that redirect traffic link farms and will exclude link-farm pages if they identify them.
However, as with much in the search engine optimization business, another myth has arisen. You may hear that if a link is found to your site from a link farm, you’ll be penalized. .
Let me set the record straight: Search engines do not penalize sites for incoming links. They can’t, or it would encourage dirty tricks. Want to push a competitor’s site down so your site can beat it? Then link to it from as many link farms as you can. Obviously, it wouldn't’t make sense for search engines to encourage this sort of thing, so links from such pages won’t hurt your site - though they won’t help it, either.
On the other hand, links to such sites may hurt you. Because you do have control over links from your site to others, if a search engine decides that you are linking to a bad neighborhood, it may penalize you.
The bottom line is that you should avoid working with link farms because they could potentially harm you, and they won’t help you anyway
Do search engines ever penalize? Sure. However, with billions of Web pages in the large indexes, these penalties have to be automated (though you can report cheating to search engines, and the offending site may be reviewed). In order to automate penalties, search engines have to create a very loose system that penalizes only the very worst offenses, or they risk penalizing innocent people. The proof is that if you spend time searching through the major search engines, you’ll find many pages that clearly break the rules yet are still included in the indexes.