I have an exceptional FLGS, I've bragged about it here before but hey I'll do it again.
www.sentrybox.com
A couple of the things they do right.
Massive selection. Their motto on the front page of the website sums it up. "If it's in print, we try and stock it".
Well organized. With give or take 46,000 items on any particular day it can be a bit dizzying the first couple visits but once you get a feel for the stores layout it's easy to navigate and find exactly what you're looking for.
Stock indy stuff. Though D&D and Warhammer take up probably 40% of the stores retail space, the rest has everything from indy board games, to Sci-Fi/Fantasy novels (and not just the top 10 stuff either), to historical wargames, not to mention smaller RPG's like Shadowrun, GURPS, Rifts, HERO and any other game system you care to mention.
Get good staff. This has been mentioned to death but I think it deserves repeating. Naturally they pretty much need to be gamers, but make sure your staff have a wide variety of interests to match your stock. Specialists are good too, but don't overdo them. SB has a guy who deals with nothing but historical wargames, another one who just manages the CCG counter and a third who only deals with novels. Staff also need to be friendly and personable, in addition to being presentable. You don't need a uniform but a 'business casual' dress code is probably a good idea.
Give people a place to play. SB has a massive upper floor with diner style booths for CCG's, RPG's and other games that don't take up massive amounts of space as well as probably a dozen large folding tables that can be used for wargames and the like. They also have an after hours game room that can be booked.
They used to have an internet cafe/gaming room attached but it was too expensive to keep things up on the technology curve so they ended up doing away with it.
Use the internet. You'll never compete with Amazon.com or Ebay but especially if you've been in business for a while take advantage of your old stock and market it to collectors. You can also have customers sign up for a discount card, Sentry Box's is free and lets me buy books at the US sticker price (a big deal in Canada). They also send me an emailed newsletter once a month with a half dozen or so coupons in it for everything from 20% off paints, to 20% off a bestseller book. The newsletter also has a list of new stock, reviews, and stuff like that.
Sentry Box is in a fairly unique position since they're almost a mini distributor unto themselves. They serve as a middle man for a lot of smaller game shops in western Canada which gives them the flexibility to do things that other game stores can't do like hang onto stock for years (or decades in some cases). They're probably not a good model for most game stores to follow but it sure works for them.