Steps
Get it out of the water as soon as possible. The plastic covers on cell phones are fairly tight, but water can enter the phone over time. But this time may be quite short - 20 seconds or less. So grab your phone quickly!

Remove the battery. This is one of the most important steps. Don't take time to think about it; electricity and water do not mix. Cutting power to your phone is a crucial first step in saving it. Many circuits inside the phone will survive immersion in water provided they are not attached to a power source when wet.

Remove your SIM card. Some or all of your valuable contacts (along with other data) could be stored on your SIM. To some people this could be more worth saving than the phone itself. SIM cards survive water damage well, but some of the following steps are unnecessary i.e. don't heat it. Just pat it dry and leave it aside until you need to connect your phone to your cellular network. Note that many phones by specific providers, such as Verizon, do not use SIM cards.

Dry your phone. Obviously you need to remove as much of the water as soon as possible, so you can to prevent it from getting into the phone. Use a towel or paper towel to remove as much of the water as possible.

Allow the phone to dry. Since you do not want to ruin your phone or lose all of the numbers in your phone book, you need to allow the phone to dry. Also, ringtones and graphics stay with the phone - not the SIM. Don't try putting the battery back on to see if it works as this would risk damaging the phone with a short circuit. Leaving your phone in a bowl of dry rice will help to expedite moisture evaporation.

Heat your phone. Apply enough heat to your phone to cause the water to evaporate without water-logging your digital screen. One of the best things you can do to save a cell phone is to set it on the back of your computer monitor or TV screen over the heat vents. This is usually the perfect amount of heat to fix your phone. The convection action of the heat vents will help carry away the moisture in your phone. Leave the phone on the heat for at least 2-3 days.

Test your phone. After you have waited 3 days, make sure everything is clean and dry looking and re-attach the battery to the phone and see if it works. If your phone does not work repeat step 4. If it still won't work, try taking your cell phone to an authorized dealer. Sometimes they can fix it.


Alternative Alcohol Soak Method
Soak in Alcohol. Alcohol is hydrophobic and will seem to draw out most of the water in the phone, which will then pour out of the phone with the alcohol. Any remaining alcohol will evaporate. Alcohol will not harm your phone but may mess up glue (from stickers and the like). Use 95% alcohol, not the regular 70% rubbing type. Do it outside! Be sure to remove your battery first. When done, leave your phone outside for a day or two to dry.
You can use denatured alcohol, which you can buy at any hardware store. This alcohol can be used on electronics and it evaporates quickly. This is commonly used to clean remote controlled cars that have electronic components, but get dirty frequently. Spray it on or rinse and let it evaporate. If you can open the phone, even better.


Tips
Don't put the battery in for at least three days, or longer if your digital screen is foggy.
Another way to dry out your phone is to place it in front of an air conditioner or air conditioning vent. Cold air won't damage your phone (hot air can warp or, in extreme cases, even melt plastic), and air from an air conditioner is dry, and so will evaporate water faster than you might think. This is why a car air conditioner will defog the windshield so effectively. Warm air from a reverse-cycle air conditioner works even better, of course. If you dry your phone in this way overnight, it should be fine by the morning.
An alternate drying technique is to seal the phone (battery, SIM card, SD card all removed) in a plastic bag with a few of the silica packs that come packed with shoes, coats, electronics. Leave the phone in the bag for a day or 2, and the silica packs will absorb the moisture.
One other way to assist in the drying process is to put your cell phone in a disposable baby diaper. Works for babies and can work for the cell phone as well.
Use a food dehydrator.
If your phone falls in the ocean or other salt water, rinse with fresh water before crystals can form after removing battery.
Try opening your phone if you can. You'll probably need a TORX screwdriver for that, but it's worth it. This may void your warranty, but it is likely the water damage already has.
It is likely that the dunk in water will kill the battery. Fortunately you can buy another for 20 to 40 US dollars. The phone itself usually survives.
Corrosion is a threat. You may want to consider soaking your phone in distilled water to wash away any minerals it picked up from the original water.


Warnings
Don't heat the battery or it could leak acid. If you use an oven or hairdryer, make sure to remove the battery first.
If you use alcohol make sure to do so outside, and do not apply heat in any form, not even the gentle heat of a monitor. Do not hook up the battery till the alcohol smell dissipates.
Do not apply too much heat to your phone, as mentioned above. You don't want to melt or burn your phone.
Most modern phones have more than one liquid damage indicator (stickers that change color when wet) on them, only one visible to you (and sales/technician agents), and chances are, if the sticker under the battery is triggered, then the odds are that the internal stickers you can't access are tripped as well. This will still result in you paying a voided-warranty fee in the long run. Warranties don't cover water damage, insurance does.
Even if all these steps are followed, minerals dissolved in the water can precipitate on solder and component pins, causing corrosion or shorting. Components pins are packed so closely together in a modern cell phone that even a small encrustation can create a short, rendering the phone inoperable.
Be warned that manufacturers place stickers that will display "void" once peeled and some will change colors in the presence of a liquid (usually turns blue or red). This helps techs know that you have dropped it in the water, as most cell phone insurance coverage policies don't cover water damage. Also note that these stickers have been known to change colors in extreme humidity as well.
Do not put the phone (or any electronic or metal-containing object) into the microwave. You will destroy electronic components and potentially the Microwave.


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