Awesome white board friday about this.

http://www.seomoz.org/blog/im-being-outranked-by-a-spammer-whiteboard-friday

My key takeaway was that those 1000s of spam links may not be what google is using to rank them. They may have a handfull of high-quality links that are better than yours and are providing 98% of their rank. That is what you should focus on, not the 1000s of spammy links.

Also, I think that a few low quality links (directories, recips, etc.) are helpful. I'm sure I'll catch flak from the purists on here, but, IMO, google is looking for diversity. I think they expect to see a few spammy links on any well established site. On the other hand, spam is certainly not as helpful as a few high quality links. I think pure white hatters exagerate the dangers of black hat. Spam doesn't hurt or we could use it to sabotage our competitors. While it's benefits may be temporary given future algo changes, I believe a small amount of tasteful spam (relevent articles, niches directories, recip from similar companies) is the only short term way to compete. All the while you should still be busting it on the high-quality stuff hoping for the day that google finally figures out what spam tastes like.

Good luck. We all fight this same battle.

I run into this all the time as a local heating contractor. IMHO, the best practise is to target all the top three phrase combinations. This avoids the penalty of having too many identical anchor phrases, and, at the same time, helps you to rank well for all the different combinations of your keywords. Gewgle is smart enough to give you credit for "Painter in Texas" as a close match to "Painter Texas" and to see that Texas Painter is likely the same as Painter Texas. Anchor text variety is the key.