What Nofollow Means
Below I'll cover what Google says it does, if it sees a link with the nofollow attributed associated with it. Yahoo and MSN are likely to react in a similar fashion, though I haven't yet spoken with them to get exact details since news of their support only just emerged.
If Google sees nofollow as part of a link, it will:
NOT follow through to that page.
NOT count the link in calculating PageRank link popularity scores.
NOT count the anchor text in determining what terms the page being linked to is relevant for.
That's the situation at the moment. Google is going to evaluate how the attribute works, and it could decide to make other changes down the line, it says.
Now let's look at the impact of each action:
1) Not following the link to the page it points at means that potentially, Google might not index the page at all. As said, the more links that point at a particular page, the more likely it is that Google (and generally the other major search engines) will include that page within its index.
The nofollow attribute DOES NOT mean that someone will prevent a page they do not actually control from being indexed, however. If Google finds even one ordinary link pointing at a page, it may then index that page.
In addition, people can submit their pages directly to Google (and most major search engines). So it's crucial to understand that just because someone might place nofollow in a link pointing at your site, this WILL NOT prevent your page from getting indexed.