Hi Pua,
There's just an element of truth in that statement to make it sound legit, but it's not the WHOLE truth...
When it comes to link exchanges, they definitely are not as attractive/desireable to Google when it comes to giving you a pr bump...
HOWEVER, the key is the manner in which it is done, and I think this is where most people go wrong.
They just charge out there & get links from anyone who will agree to give them one in exchange for giving a link back.
This tends to see viagra sites linking to golf sites, which link to travel sites which link to god knows what! :-)
Yes, a link exchange between 2 sites that discuss similar topics IS a good thing, but even if the other site doesn't discuss the same topic as you, doesn't mean you can't effectively swap links.
So, the BEST way to do it is via a post on each other's blog pointing at a particular page in the other person's site, discussing a particular subject and having a good reason for having a link in there.
Make sure you both don't link to the other's home page. Instead, aim to link to a specific post/page article deep inside their site. In the SEO world, we call this deep linking.
Also, make sure there is a GOOD reason for writing a post that includes that link. For example, your PR 5 site owner could write about his/her recent trip to Hawaii and include a link to your site as a resource they used to research places to go & things to do while there.
Then, you write your own post telling about the subject this person focusses on, and include a deep link to one of their pages as a resource, etc.
Here's a real world example. On my own blog, I write about my travels in the SEO & Adwords world (since that's what I do professionally), but just recently, I posted an article about the Red Bull Air Race that was just held in my home city of Perth, Western Australia.
Totally off topic for my blog...BUT, (i) it's my blog and I can write what I want to on it :-) and (ii) I included several outbound deep links to pages of relevence to the topic.
Now, Google is not going to penalise me just because I haven't written about this topic on my blog before (after all, aren't blogs MEANT to be all about writing about your thoughts and musings?) JUST because I discussed the air race instead of SEO, AdWords, etc.
More importantly, those sites I linked to are not going to get penalised by Google just because I don't normally write about the air race.
Instead, Google will look at the content of the entire article and take that into context, AND examine where the links go & what they are about. You can quickly see that all links are relevent and on topic, so my link will benefit their site, even though my blog is not about that topic as a rule.
You can see the exact article here as an example:
Red Bull Air Race Perth | EranMalloch.com
Yes, link exchanges are not as good as one-way incoming links, BUT if done properly and everything is in context, they will help, not hinder.
Also, Google does not indiscriminently penalise a site for the links that come into them. Otherwise it would be easy for one person/company to cause their competition to be penalised by setting up a pile of trashy links to them. However, they will look at where you link to and as long as its a genuine legit site, they won't see that as bad.
They CAN minimize the value of a link if they deem it suspicious, but it doesn't make sense for them to PENALIZE your site for the incoming links.
After all, how can you - as a site owner - totally control who links to you and how & why???
Just be more aware that a great link works BEST when there is context surrounding it, rather than just an isolated link pointing to someone's site, with no accommpanying text to justify it.
OK Pua, I hope this helped? Feel free to ask more questions if you need to and you can use my red bull post as an example (to the other site owner) of how to do it right.
All the best.
Eran Malloch
http://EranMalloch.com