I posted this on an SEO forum, and thought my visitors here might find it helpful too.
What happens with links is there is a positive or negative rating from a site that may be relevant to yours or not and it that site’s rating gets passed through on to your web site through the link on their site.
rel=”nofollow” is used on a link when the site the link is on doesn’t want to pass their positive rating on to the site the link is pointing to. I have a great site on cats and you have a site on cats, someone puts a link on my forum going to your cat forum. While you may be a site with a relevant topic, I may not know if your site is trusted by me or you may be my competition and therefore I’m not looking to help your site get a boost on the search engines. Does that make sense?
rel=”follow” is used when you are a trusted site to me and I DO want to help you out because your site is relevant.
This SEO nofollow link strategy is used mostly to help keep spammers from talking about their sites and getting some link farming built up. It can be helpful to use nofollow when the link is pointing to a site about airplanes and your site is about cats. No use giving the airplance site a bonus when the it’s not even a relevant site.