Id be interested to hear everyones opinions about this issue. Based upon what Ive experienced, I'd be inclined to say the no follow tag has no effect. Around about the same time the no follow tag was made public, I was selling direct advertising to a site which was advertising on one of my sites for direct traffic purposes only. I figured this was a good opportunity to make use of the tag. At the time this site was a PR0 and the owner of the site was not SEO savvy and wouldnt have been participating in other link exchanges. When the last PageRank update came around the site jumped to a PR4 from my site-wide link. So is this tag really working? Have any of you observed certain sites go down in rankings which were blog spamming previously? I havent really looked too much into this so I couldnt say. Perhaps the tag only works on blogs and not other forms of sites to prevent abuse of it?
The no follow tag is for exclusionary purposes. If you use it as an inclusion device, according to what I read in the google webmasters guide, you are using it wrong and it is probably being ignored.