I have a site that was ranking well in MSN and Yahoo until I put some affiliate ads up to help pay for the cost. MSN didn't fall too hard, page 1 to top of page 2, but Yahoo fell from page 2 to page 7. I nofollowed the links so Google doesn't seem to mind it so much, we are actually gaining there. Is there some way to hide the ads from Yahoo and MSN since they don't appear to pay attention to nofollow tags?
MSN and Yahoo should be respecting rel="nofollow" last I checked, so this does appear to be rather unusual. How long ago did you do this, how old are the pages that are dropping from the rankings, and how are your competitors doing (on average) with regard to the same keywords?
Even if you use the nofollow attribute the search crawlers can still see the actual link and probably knows the address where it goes. To many people think itself safe to put not-so-nice links as long as the use the nofollow attribute, remember they can physically see the actual URL and 99.9% of the time it's probably already been indexed by the search engines. Now, I personally don't believe search engines will de-rank you for 1 affiliate link, now we haven't seen your site to give a real opinion if thats the reason why it de-ranked. It could of just played out that you added it before your site was about to be de-ranked in the search results. Please provide a URL so I can give a better opinion.
I somehow doubt that the search engines would penalize you for putting the nofollow attribute on affiliate links. While it does seem like you are trying to have your cake and eat it, too (place a link to make money, then disavow it to fool the search engines into thinking you don't trust it), the worst I can see is they downgrade your Toolbar PageRank...which is what they do if they think you are selling links (a far, far worse transgression). In any event, make sure you have removed all nofollow tags from links you put there yourself. It's like wearing a big Neon Sign saying, "Hey Search Engines. I'm pulling the wool over your eyes. Nyaa, nyaa, nyaa".
The site is the chat site in my signature. I do have to make money with this site to help pay for the hosting as it's not cheap for site like this. I do also have to say that about the same time that I added the affiliate ads I also went with a new template and added the video sharing component. I wouldn't think that the new template should hurt it much but there are some validation errors in the top rated videos module that I've been trying to fix. It could just be a combination of everything that drove me down, but like I said before we are actually gaining in Google while sliding in Yahoo.
I think it would be safe to go ahead and throw a no-follow up there since they are paying you for sales and not to give them pr it shouldnt matter right? I was curious about your question also.