How is VoIP traffic prioritization accomplished?

How is VoIP traffic prioritization accomplished? Do you need specific software to make it work? Should it reside...

in routers or in Ethernet LAN switches?

Quality of service can be accomplished either in your equipment (layer 3 components) or via a bandwidth manager such as Packeteer's product. A bit in the IP header is changed to indicate what priority the packet should be processed. The quality of service bit is the first bit of the type of service byte. There are newer methods (DiffServe) but it functions relatively the same way.

It will depend on whether you are using H.323, SIP or DEC for your VoIP, but what happens is that the routers and layer 3 switches look at the quality of service bit and determines if the packets should be processed ahead of other packets. It will throttle back data (which can stand a few re-transmissions) and let voice go ahead (which does not do well with re-transmissions.)