A subject shrouded in mystery and urban myth.

DOs:

Build quality, relevant referring sites such as:

http://dmoz.org  - the Open Directory - Difficult to get listed and of slightly less value than it used to be - it is still good for obtaining PageRank.  You may want to consider becoming an editor.

http://dir.yahoo.com - Yahoo Directory

http://www.botw.org - Best of the web

http://www.aboutus.org - Who-is linked website directory

Trade Directories are valuable if they are ON-Subject, well moderated and with high reputation.

Relevant link-partner sites

Use a suggestion service like "Crosslink-builder.com" but do note in terms of value-returned-for-effort-expended reciprocal link building is a desperately time-intensive, low-returns activity. 

Track your links using a good tool like Arelis Link Manager. (Now part of IBP toolset).

Abolutely DO NOT's

NEVER use mass submission tools or link farms. Period.  At best, your site will gain no link reputation at all.  At worst, your site will be penalised by search engines.

Do not link to bad neighbourhoods.  The Google "caffeine" release in early 2010 will now penalise you for this. 

Do not maintain broken links.  These are also penalised under "Caffeine".