Rand at SEOmoz published some great information based on questions he asked Matt Cutts. There were several interesting questions answered, but I think the biggest nugget was the suggestion that you can freely use NoFollow within your own site to control PageRank flow, including on your own internal links, without fear of it being seen as a poor quality signal by Google. The quote from Matt was as follows:
The nofollow attribute is just a mechanism that gives webmasters the ability to modify PageRank flow at link-level granularity. Plenty of other mechanisms would also work (e.g. a link through a page that is robot.txt’ed out), but nofollow on individual links is simpler for some folks to use. There’s no stigma to using nofollow, even on your own internal links; for Google, nofollow’ed links are dropped out of our link graph; we don’t even use such links for discovery. By the way, the nofollow meta tag does that same thing, but at a page level.
This opens up some really interesting advanced SEO techniques. For example, do you really want to have PageRank flowing to that “Contact Us” page? Or that “About Us” page? Or a page that simply lists your clients? Now you can keep the page there for users, but tell Google that you don’t want to spend any PageRank on them.
For that matter, you can do some research on your site using web analytics, and find out what pages are not providing any traffic any way, or which pages are not providing any conversions. Then you can take these pages and cut back on the PageRank flow to them, and increase the PageRank flow to the pages that matter the most.
If you have a large and complex site, this opens up some great dynamics. I suspect that this statement by Matt launched a few thousand experiments in understanding how to leverage this aspect of NoFollow.