Most search engines (like MSN, Google, and Yahoo) look at the links you have coming to your site as votes. In a sense, each link to your site is like a little endorsement. The more links you have pointing to your site, the higher you will rank in the search engines.
So what did people do?
People created link pages. They would create a link from their home page to a page on their site that they filled with links. These were links to other sites that were linking back to them. Not complicated. For example- I would add a link to your site on my links page, then invite you to add my link to your links page. We then became link partners. This worked well, for a while until...it went out of control!
How good link pages went bad!
Certain sites began emailing 100's of sites a day looking for link partners. Then other sites created link pages with black hat seo tricks that really messed things up for a lot of people. Still other sites let you add 1000's of links to your site instantly- REALLY BAD IDEA.
Why? Because search engines know that acquiring many links very quickly is unnormal and they will simply ignore those links or your site completely! DON'T DO IT!
So how do you ethically exchange links?
First, create a links page that is linked directly to your home page (in the same directory too). Then make sure the page is useful to your visitors. Add a description about your link partner's website that is unique and USEFUL to your visitors. If you sell screwdrivers and your link partner sells hammers, then tell your visitor why hammers are useful and why your link parner's site will offer useful tips on using hammers. This example link exchange website does this automatically so you focus on content and gradually build links.
See my point? Then add a few links every day. maybe 10-20 links/week. Build your links up slowly. Before you know it your site will pull in the top ranks.
Focus on the visitor experience. This will be the sure way to win search engines and repeat traffic from your existing visitors. Your link page can do both!