SEO, or Search Engine Optimization, is the process by which a web site is "optimized" for better visibility in the search engines. It includes tasks that are done in an effort to get your web site to appear in the search listings when people type related words into the search engines.
There are two main components of successful search engine optimization of a website. The first component is what is called "on-site" SEO, and it includes the things you do directly to the html code of your website's pages. It may be the placement and use of keywords and key phrases throughout the website's content, and it may be the use of appropriate meta tags.
The second component of successful search engine optimization is the process of backlinking. When search engines "look" at your website, they also take into consideration the number of websites that link to your site, as well as the types of websites that link to your site. A higher quality backlink will have more weight than a lower quality link.
Important to understanding how backlinking works in terms of SEO strategy then, is understanding what makes a link a high quality link. A high quality link to your site is one that will include one or more of your website keywords in the anchor text. (The anchor text of a link is the actual part of the link that is clicked and takes the person doing the clicking to your website). The reason a link with the keyword in the anchor text is given more weight than links without your keywords in the anchor text is that it appears that the links are coming from sites with related information when the keywords are found within the anchor text.
A website that has hundreds of incoming links from sites with no relevance to the subject matter of your website will not be as beneficial in terms of search engine optimization as a website with just a few dozen backlinks containing your keywords in the anchor text.