Google is a good place to start for the answer.
xhttp://www.google.com/corporate/tech.html (copy and remove the x)
The big thing with Google is that they value your site more when other people link to your site, especially when the site linking to you is about a similar topic, and itself has a high ranking.
The cherry on the cake is if you dont have a reciprocating link back to the other site, making it appear as though the other site is linking to you because they really value the content at your site, and not because you are exchanging links.
Well, the above explanation is what we all really assume based on experience, because Google isn’t very forthcoming when it comes to explaining their deep dark secrets. For all we know they could be using a Microgaming random number generator to give us rankings. I can just imagine Sergey and Larry giggling to themselves in their office jacuzi whenever they see an explanation such as the one i’ve just given.