I spotted a good Google Groups thread that has Google's official word on how they handle the nofollow attribute in links.
When Google began complying with the nofollow attribute, they posted this blog entry but people are still fuzzy today on how they handle it exactly.
Adam Lasnik of Google replied to this question:
Does Google crawl a rel="NOFOLLOW" tagged link and not give it credit, or does it just stop at the link and not visit that page unless it's found elsewhere?
Adam said the "latter" so, Google will not even let the spider crawl links that have the nofollow attribute. But it will crawl the link if it is found elsewhere.
Forum discussion at Google Groups.

Comments:
SearcH EngineS WeB
02/15/2007 02:14 pm
One really wonders if that is true - many Webmasters have claimed that they were able to get their BRAND NEW SITES spidered bot and cached on Google Yahoo and MSN by submitting the links to forums and blogs that used the NOFOLLOW - even when they did not submit it any place else. Also, sometimes, the backlinks are credited in Google from sites with NOFOLLOW backlinks
Michael Martinez
02/15/2007 03:33 pm
There is no need to wonder if the claim is true. The major search engines all send their spiders to new domains regardless of whether those domains have any inbound links.
BoSolaris
02/16/2007 01:47 pm
So, say you had a banned site link on your site....if you had no follow, does this make google blind to the fact?
Traffic Slurp
02/16/2007 02:01 pm
Hi, The 'no-follow' tag has definitely created some angry blog posts this week. The best I think is <a href="http://www.searchenginejournal.com/?p=4410" rel="nofollow">13 reasons why nofollow tags suck</a> on search engine journal's blog. Yahoo at least looks like it ignores 'no-follow' tags anyway. Ta-Ta
Justin Seibert
02/16/2007 06:26 pm
It may not give the links credit in terms of score, but they show up as inbound links in your Webmaster tools, so they must at least recognize them.
No Name
05/08/2008 06:07 pm
I want to know if "nofollow" passes anything at all as far as PR goes.
mike
05/19/2009 05:35 pm
I have at least one confirmed no-follow link that appears on webmaster tools.
Kamal Patel
09/03/2010 06:44 pm
Is google still consider NOFOLLOW attributes? Is it fine to use nofollow tags for interlinks?