I'm having a difficult time understand exactly how this works. If someone puts a link up on their site to one of mines it help my pagerank expescially if its higher as well as link popularity. When they add rel="nofollow", it tells a bot not to follow the link. But does that all hurt from getting a good pagerank from the site aswell as link popularity?
Yes, that's right.. it won't help towards link popularity or page rank. Most links from social bookmark websites, forum signatures (but DP is not ) etc are nofollow links.
I've noticed alot of sites using this recently. Youtube is now using it for all external links. All it does is tell the spider not to give you any rank from that link.
It is useful for advertising your site and can help a little with traffic but it is not followed by bots so it will not help with PR. It is questionable rather it helps with SERP. I have seen varying opinions on this. If the site is related to your niche and is a popular site, you can still get some great traffic from a no follow so i would not avoid them all together because traffic is much more important than PR.