Inbound links are links made by other writers to your blog or page. There are two broad categories of inbound links; first, links to your content in the other site's sidebar or blogroll, second links to your site or page in the content, a post or a page, of the other site. You want inbound links. You want them quite a bit; inbound links help Google and other search engines find your site, and individual pages or posts on your site, because they follow links to see where they go.
In the case of Google, when Google determines PageRank for a given page or post, (PageRank determines the order a particular site is listed when a user performs a Google search), Google counts the number of "votes" a given page receives in terms of how many other sites link to your site or page. Links to your site by a page that has a high PageRank count more; you thus have a higher PageRank of your own.
Google's calculations and algorithms are pretty good at determining a "natural" link made by a person from one that's made just as a way of "fooling" the system. Your best bet in terms of attracting quality inbound links is to provide interesting, carefully written content that you've researched—and that has quality outbound links. Your outbound links can help other Webmaster, bloggers and writers find your content—and link to it.
Using various SEO techniques designed to generate search engine traffic is less likely to earn inbound links than quality writing. You're better off writing interesting content that will entice your readers to keep reading, to send a link to your page to friends, and to link to your writing on their site or blog. Yes, use the terms that naturally best describe your topic, but also use natural synonyms. Don't be a boring writer. In the long run, you're writing for people, not bots. If you link to interesting content, interesting content, and higher ranked content, is more likely to link to you. Oubound links can drive inbound links.
If you're a blogger, think of blogging as a conversation, between you and your readers—and that includes other bloggers and the people who comment. on your posts. Be courteous. Respond to comments, and when you link to another blogger, send them a note. It's not only the courteous thing to do as a member of the blogging community, it leads to some super friendships, and often, a return link.
As usual, you don't have to take my word for any of this. Here's Google's take on inbound links, with lots of references to suggestions for improving your inbound links. Here are Google's suggestions for bloggers to improve their posts, and here's an interview from Google's own Matt Cutts, a Google tech, and a blogger, with lots of good suggestions for improving blogs and traffic.