If you own a website, you've probably heard of google pagerank. Pagerank is only one of numerous methods Google uses to determine a page’s relevance or importance. Google interprets a link from page A to page B as a vote, by page A, for page B. Google looks not only at the sheer volume of votes; among 100 other aspects it also analyzes the page that casts the vote. However, these aspects don’t count, when Pagerank is calculated.
Pagerank is based on incoming links, but not just on the number of them - relevance and quality are important (in terms of the Pagerank of sites, which link to a given site). As you may already know, link exchanging is the process of exchanging text links between websites. Webmasters exchange links to improve traffic through numerous inbound links or link popularity. Exchanging links is normally a free process (unless you choose to a fee-based link exchange program), making link exchanges cost effective. Link exchange is the key to improve your ranking in organic search results and that's why it is one of the most cost effective method of generating relevant traffic.

Pagerank is based on incoming links, but not just on the number of them - relevance and quality are important (in terms of the Pagerank of sites, which link to a given site).

PR(A) = (1-d) + d(PR(t1)/C(t1) + … + PR(tn)/C(tn)). That’s the equation that calculates a page’s Pagerank
Not all links weight the same when it comes to PR.
If you had a web page with a PR8 and had 1 link on it, the site linked to would get a fair amount of PR value. But, if you had 100 links on that page, each individual link would only get a fraction of the value.
Bad incoming links don’t have impact on Page Rank.
Ranking popularity considers site age, backlink relevancy and backlink duration. Pagerank doesn’t.
Content is not taken into account when Pagerank is calculated.
Pagerank does not rank web sites as a whole, but is determined for each page individually.
Each inbound link is important to the overall total. Except banned sites, which don’t count.
Pagerank values don’t range from 0 to 10. Pagerank is a floating-point number.
Each Page Rank level is progressively harder to reach. Pagerank is believed to be calculated on a logarithmic scale.
Google calculates pages PRs permanently, but we see the update once every few months (Google Toolbar).

Smashing Magazine did an outstanding article on Google page rank last year. If you're looking to get a better understanding of Google page rank, please read the complete article here:

Smashing Magazine - All About Google Page Rank