The text that a user would click on to follow a link. In the case the link is an image the image alt attribute may act in the place of anchor text.
Search engines assume that your page is authoritative for the words that people include in links pointing at your site. When links occur naturally they typically have a wide array of anchor text combinations. Too much similar anchor text may be a considered a sign of manipulation, and thus discounted or filtered. Make sure when you are building links that you control that you try to mix up your anchor text.
Example of anchor text:
<a href=”http://www.seobook.com/”>Search Engine Optimization Blog</a>
Outside of your core brand terms if you are targeting Google you probably do not want any more than 10% to 20% of your anchor text to be the same. You can use Backlink Analyzer to compare the anchor text profile of other top ranked competing sites.