To this day I still hear this question asked on blogs, forums and addressed in newsletters and its about time someone put this to rest.
The internet relies on links to and from websites. 
We know this, Google knows this.
The only reason reciprocal linking stopped working as well as it used too, is becuase people took it for granted that it was an easy way to increase the rankings on their site. By sending out 50-100 link requests emails every day you could easily get 10-15 links pointing back to your site every day, and in the early days this was the only strategy people used to get links.
…and it worked great!
But sites that were poor, outdated and oftentimes copied content were appearing at the top of the search engines due to all the links they had received – it was time to put this strategy to bed.
So Google reacted and even though reciprocal linking is not as effective as it once was.. It still works if you don’t take this too extreme and use it as the link spamming technique it once was.
Start thinking like Google and you will be much better at SEO..
Here is how to approach reciprocal linking in 2009:
1. If you have a new site do not start the link building process by garnering reciprocal links first. You need to build authority links into your site first to gain trust.
2. Reciprocal linking should never be used as a sole strategy for link building – mix it up with other strategies like directory submissions, articles submissions, press release distribution, social bookmarking, social media link baiting etc… get 1-2 links per day from each and build your links slowly over time.
3. Don’t send out 50+ emails every day or week for that matter to people in *unrelated* industries requesting link exchanges. Find only the best resources for your market and contact them personally by phone or email with a *personal* message.
4. Focus on building relationships with these people and the links will come – try building 1-2 *good* relationships per week. Add them to your recommended resources or links page and then call them or email them. Tell them how you liked their website and have linked to it from your site, then kindly ask them to check out your site for a possible reciprocation.
..by following along above you are not spamming your way to higher rankings, you are merely recommending resources to your customers and contacting the site in question to see what they feel about your site.
It’s not the reciprocal linking that Google dislikes its the spammy way people approach it, that’s the problem.
Build a good site with excellent content, then Build relationships with people in your marketplace and the links will follow.
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