Just like Kapster pointed out, Nailosaurus has a tutorial.. I prefer to use a makeup sponge though (the wedge-shaped ones) I find it gives a smoother look than any other sponge. And I know some people complain that the polish starts to "eat" the sponge, but that doesn't happen when I use a makeup sponge!
I polish my nails with the color I want to be at the cuticle end of my nail. then on the make up sponge, I put the other color(s) AND the base color and sponge on that way...you get a better blend/gradient by using the base color again on the sponge with the new color(s) - hope that made sense! LOL!