Nofollow means that the search engine spiders will not follow the link and give it any "credit" as a backlink. In other words, the search engine will not see it as a valid link.
You want links pointing to your site to not contain the nofollow so that they count towards increasing your page rank.
MadDog - As I understand it NOFollow works like CatWoman said so it shouldn't be used for external links but what you can use it for is to direct search engines to only count the internal links you want counted. For example if you had a home page with two internal links, one to your sales content and one to a faq or legal disclaimer page you would use NoFollow on the FAQ page so that all the link credit gets passed to the sales content page.
