Editors and graduate students (often one and the same, when you're submitting to collegiate journals) love to espouse the advice show, don't tell. This is largely a function of creating authentic dialogue. Of course, it also means avoiding the dreaded information dump as much as is practical, and every rule should be taken with a grain of salt.
Many of my favorite writers do an awful lot of telling, and the work is certainly none the worse for it.
But to discuss today's topic of dialogue, I'll start with advice taken from one of my favorite resources, Strunk and White's The Elements of Style.
Page 75, Section 11:
It is seldom advisable to tell all. Be sparing, for instance, in the use of adverbs after "he said," "she replied," and the like: "he said consolingly"; "she replied grumblingly." Let the conversation itself disclose the speaker's manner or condition.
The authors go on to call dialogue heavily peppered with adverbs "cluttery and annoying," which is certainly not the desired effect you want with your work. In On Writing, Stephen King takes the adverb culling a step further, advising authors to use a chainsaw when cutting these terms from your work in progress.
Good advice, I think.
Page 76, Section 13:
Dialogue is a total loss unless you indicate who the speaker is. In long dialogue passages containing no attributives, the reader may become lost and be compelled to go back and reread in order to puzzle things out. Obscurity is an imposition on the reader, to say nothing of its damage to the work.
Place attributives...where the break would come naturally in speech--that is, where the speaker would pause for emphasis, or take a breath. The best test for locating an attributive is to speak the sentence aloud.
This is simple, sound advice. I read every story out loud at least a few times before I send it out on submission. I've found it's the best test for fluidity in my prose, and it does improve the dialogue. Words spoken carry different weight than they do on paper.
When I wrote Wendigo a few years ago, I had longer scenes that often included three or more characters having a talk. It got old doing the he said/she said, and I was curious for some advice on the topic. I attended the First Coast Writer's Festival here in Jacksonville where Steve Berry, a very gracious man and fine writer, gave a talk on crafting the novel. During the Q & A I posed my question. Berry liked the question, saying he'd been waiting to answer that one for some time, and he told me that the trick there is to use mannerisms.
Sally leaned forward. "What do you want from me?"
"Nothing," Jim replied, "I don't want anything at all from you."
I took a class in graduate school on Ray Carver. I can't find the article, but I read an interview once where Carver once said that the attributive "he/she said" is the best bet. It's the most honest. I tend to agree. I'm a "he/she said" guy first and foremost, but I sprinkle in "replied" and "asked" as well. There are a number of others I'll go to also.
And remember, sometimes you can convey mood in the dialogue through the punctuation. I noticed this passage last night in John Connolly's (excellent) novel The Book of Lost Things:
"Fresh meat!" she whispered to herself. "Fresh meat for old Grammer's oven!"
The juxtaposition of the exclamation points with the attributive "she whispered" creates a different effect than merely saying: "Fresh meat!" she hissed. The meaning is fairly uniform, but Connolly's version has a stronger undercurrent of menace and immediacy to it.
One final note. Never, to the best of my knowledge, have I ever used the term "he laughed." It's difficult to speak and laugh at the same time. Try it sometime. I always use:
"Ok, ok," Jim said, laughing.
Or something of that nature--you get the idea. It's a little idiosyncrasy, to be sure, but it makes sense to me.
As an exercise, try writing a short story that's better than 90% dialogue. If you want a model, take a spin through some of Carver's stories in the Vintage edition of What We Talk About When We Talk About Love. Lots of great examples in there.