SEO Theory has put together a very well written document that covers the SEO myths surrounding PageRank and the NoFollow attribute. The document is a long, but informational read. I’ll try to cover the highlights for you.
SEO Myth Number 1. You Can Control The Flow Of PageRank On Your Site
Fact: Your PageRank is influenced by four factors:
- What you do with your pages
- What other people do with their pages
- What Google does with its filters
- Time
Fact: PageRank begins with your pages.
Fact: PageRank is an estimate, not a specific value.
SEO Myth Number 2. Rel=’nofollow’ Can Be Used For Search Engine Optimization
We throw “SEO” around like a word these days, and in some ways it has become a word. But it also remains an acronym for “search engine optimization” and optimization refers to the process of modifying Web pages so that they achieve optimum visibility in search results.
Can you use “rel=’nofollow’” to optimize for search? No.
Can you use “rel=’nofollow’” to optimize for anything? Yes.
Be sure to read the entire article, The PageRank control myth and the nofollow-for-SEO myth
Thoughts and Insanity From Jeff 
Be sure to read the comments on Sphinn as well
Sphinn is Danny Sullivan’s DIGG-clone for the SEO community. Someone there Sphunn the SEO Theory blog post (thanks for linking to it, by the way) and a few people — including Matt Cutts — objected to some points I made.
I don’t participate in Sphinn so did not respond to the comments there. Instead I wrote Matt Cutts, Michael Martinez, PageRank, and Link Flow where I addressed some of their concerns.