Hi Bob,
Great question. I wrote a post a few months back about this when SEOmoz re-released it's Directory List - most of the advice still applies today:
http://www.seomoz.org/blog/seo-link-directory-best-practices
I don't think directories are inherently bad for SEO, although their value has certainly diminished over the years. That said, I generally stay away from "general" directories and stick with niche specific directories. Some general rules to follow:
- Make sure the directory is editorial - if they accept anyone, you don't want to be there.
- Be sure to make directories only a small part of your overall link building effort. An old rule of thumb used to be 2 regular links for every directory link. I might go 4 to 1 just to be safe.
- Be wary of directories that let you choose your own anchor text. Not only are these directories usually lower quality, but over-optimized anchor text can lead to penguin dangers.
- Check the ratio of MozRank to Page Rank. The closer this ratio is to 1, the less likely the directory has been penalized. For example, a directory with a homepage Mozrank of 6, but a PageRank of 1, probably has had an algorithmic or manual action taken against it by Google.
- Niche specific directories are best. If you run a nursing home, try to get in directories of nursing homes.
In short, it's fine to use directories, but be cautious, and use them in moderation. Think of them like sprinkling salt over your larger link building efforts.