How does Google handle nofollowed links?

We don't follow them. This means that Google does not transfer PageRank or anchor text across these links. Essentially, using nofollow causes us to drop the target links from our overall graph of the web. However, the target pages may still appear in our index if other sites link to them without using nofollow, or if the URLs are submitted to Google in a Sitemap. Also, it's important to note that other search engines may handle nofollow in slightly different ways.