Q1: Does it have to be a brand new website or can we use an existing website?
A1: You may use existing websites.

Q2: Are keywords allowed on folder names and file names?
A2: Yes - absolutely

Q3: Can we use part of key phrases in the domain or subdomain?
A3: No - The rule clearly states: "The competition is only open to domain and sub domain names that do not include the key phrase in any form"

Clarification: You will not be allowed the words "busby", "seo" or "challenge" in the sub domain or domain.

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The search engines index your website by using their crawlers or spiders. Search engine spiders are not really crawling spiders but little software bots do nothing but visits the URLs and check your links and follow them. Once the page are crawled and recorded it begins page indexing until your site appear on search engine like google, yahoo and msn.