1. “Drama is life with the dull bits cut out.” -Alfred Hitchcock
Dialogue
“Drama is life with the dull bits cut out.” -Alfred Hitchcock

2. Step 1 LISTEN to people talk
In order to write dialogue well, pay attention to how dialogue is exchanged in real life.
Do they have to explain a lot, or is much understood?
Do they talk in complete sentences or fragments?
How does rhythm come into play in everyday speech?
Also pay attention to how little it takes for you to understand what they're talking about. Your dialogue should operate in the same way, communicating a lot, but spelling out very little.

3. Step 2 Almost like the real thing…
In general, keep sentences short. Oakley Hall, in The Art and Craft of Novel Writing, offers the rule, "One thought at a time and keep the lines short." Most people don't talk in perfectly formed, complex sentences.
Which would be more true to life? If a character said “I overslept this morning and am in dire need of a cup of coffee.” or simply say “I’m so tired!”

4. “Hi, Missy,” I said in the nicest tone I could muster
“Hi, Missy,” I said in the nicest tone I could muster. “Your blouse is very lovely.”
“Thank you very much Parker! How awfully good of you to notice,” she replied.
Jackson shot me a smile of gratitude. “Parker, I’m in need of my Biology book. May I have it back?”
“Of course!” I said. I then reached into my locker, pulled out the book, and handed it to him. “Here you are.”
“Thanks!” Jackson replied as he took the book from my hands. “Well, we must be off now. I don’t want to be late.”
“No, that would be very bad indeed,” Missy chimed in. “Too-da-loo,” she said.
For Example…
So this is the slideshow I used for dialogue. On slide 4 we talked about how the grammar and rhythm are fine, but it’s not realistic.  They offered suggestions for change.  On slide 6 I had them read it to themselves and re-write it, omitting unimportant and repeated information.  I came up with it on the fly right before class, so it’s not the greatest example, but it worked out

5. Step 3 Less is More
When writing dialogue, keep in mind the three-sentence rule: give no character more than three uninterrupted sentences at once. You really can trust your audience to read between the lines: in fact, part of the pleasure of reading a story is putting the pieces together. And most importantly, remember that your characters should not tell each other things they already know.

6. When in doubt, just use the classic
Step 4 Don’t Overdo Tags
Veering too much from "he said/she said" only draws attention to the tags. Don’t try to be too fancy. While readers tend to read over these phrases, obvious efforts to insert variety, through words such as "interjected," "counseled," or "conceded," pull the reader out of the action. If the writer is doing his or her work, the reader is already aware that the speaker is interjecting, counseling, or conceding. The writer won't have to say it again in the tag.
When in doubt, just use the classic
He/she said
he said
she said

7. Step 5 Beware of Stereotypes, Profanity, and Slang
Stereotypes are best avoided altogether, unless you're writing satire, and profanity and slang are best used sparingly. With regard to stereotypes, only write in dialect if you know the culture intimately

8. Stereotypes in Dialect
Valley Girl – “Like, Oh My God, Like, that’s so not cool.” Hillbilly – “Yeeee---haw! Git ‘er done, Pa!” Gangsta – “ Yo dawg, ‘sup? Ima cruise down to the east side and bust some caps, you down?” You try! British person; Doctor; Southern Person

9. Step 6 Correct Punctuation
Comma after dialogue tag:
John said, “I am happy.”
Comma before dialogue tag:
“I am happy,” said John.
If a dialogue tag is in the middle of a character’s statement, the first word after the tag is not capitalized unless the proper noun or personal pronoun requires it:
“Beyond that,” she said, “who knows?”
"Even if you get it," she said, "John won't."

10. Punctuation continued…
If you use a question mark, you don't need to change to a comma.
"What do they think they're doing, keeping a thing like that locked up in a school?" said Ron finally. "If any dog needs exercise, that one does.”
What about when the character is thinking, not speaking?
Generally, don’t use quotations for thoughts.
What about flashbacks?
You can use italics for flashbacks

11. Fix the dialogue– Add punctuation!
Hi Jacob said Betsy. Did you do the creative writing homework? Not yet, said Jacob. I don’t know how to tag the dialogue.

12. Fix the dialogue!
“Hi Jacob,” said Betsy. “Did you do the creative writing homework?” “Not yet,” said Jacob, “I don’t know how to tag the dialogue.”

13. Distribute Dialogue Rules handout
Complete re-writing the dialogue activity.

14. “I love to go to the movies,” Cameron said, “but there is nothing good showing at all.” “I know,” Marcie replied, “it is crazy how many crappy romantic comedies they churn out!” “Tell me about it!” Cameron exclaimed. “If I see one more stupid Kate Hudson/Matthew McConaughey puke-fest I will personally poke my eye out with an ice-pick and perform my own lobotomy.” “I think that may be a little big outrageous,” Marcie pointed out, “but I can get behind the sentiment. My big beef though, is the crappy horror movies. What happened to scaring us rather than grossing us out?” “Would you rather go out to dinner tonight?” Cameron asked. “Sounds like a plan,” Marcie agreed. They left to go to the corner deli, walking arm in arm.