27 Feb 12 6:11 pm
While not necessary and arguably irrelevant depending on who you ask, adding No Follow to your affiliate links basically nulls your "vote" for the link in question and does not allow pagerank to be passed.
Another way to look at it is, imagine that you have two links on your page. One goes to a cool site that you found and really like and recommending it to others is not for compensation, it's just something that you think is genuinely cool. So you setup a normal link and tell the search engines that this is a good site that you "vote" for and they should check out/add the vote to increase that site's rankings.
The other link is to something that you are promoting (affiliate link) so even though this should be something cool that you recommend as well, by placing the No Follow tag on the link, you are acknowledging to Google that there could be a conflict of interest (since you are compensated for promotion) and therefore they shouldn't consider your link as a valid "vote" of confidence.
Long story short, use No Follow on affiliate links.