This has been a hotly contested debate over the past year as webmasters continue to try to find new ways to improve their rankings in SERPs.
The basic premise of a link wheel goes like this. You set up 5-10 hosted blogs on sites like Blogger, Wordpress, Sqidoo, etc. These are called the 'spokes'. Then you place a prominent link on each one of them to your main site that you are trying to promote, called your 'hub'. You also place a link on each 'spoke' to another 'spoke'.
When you are finished, your configuration should look a little like this...

Unfortunately, that's where most webmasters stop. "I've built my wheel, now where's my traffic?"
But that's not how it works. This configuration in and of itself is practically useless. Links to your site on these 3rd party hosted blogs, having no inherent traffic, no backlinks, and no PageRank, are worthless.
Unless, of course, you actively promote each 'spoke' in your wheel. If you build links for each one of your 'spokes' through traditional link building techniques, such as blog commenting, forum posting, social bookmarking, etc, then you build up traffic and popularity of these sites, which in turn pass some traffic and popularity on to your main target site.
But wait a minute. Now instead of promoting one site, you've got SIX sites to promote. Sounds like alot of work, doesn't it? Well, it is. Not only do you need to promote each spoke, but you also have to provide unique content to each one.
And what benefit is it to link the 'spokes' to each other? This just makes it look like some complex reciprocal linking scheme that Google hates so much.
But there ARE some advantages. For one, you control the content on each one of these spokes. You can optimize each page for your important key phrases, in some cases you can get on the same page of a SERP as your main target site. I've seen one site that has FOUR different pages, one on their target and 3 on their spokes, all on the same first page of a SERP they were targeting. Can you imaging having 4 out of the top 10 results of a targeted SERP? Talk about blowing away the competition.
My recommendation is that if you can come up with enough unique content for each spoke, and you have the time to do the extra search engine optimization and link building for each spoke, it can be very advantageous to set up a similar configuration. But I wouldn't link the spokes together. I'd set up more of a 'star' than a wheel.
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