SEO - inbound links vs. organic site optimization

I recently started reading a book about Google, and even though I was already familiar with its origins, I'm still impressed with how they came up with the concept of ranking based on importance, and importance based on back links. And how they were able to build the first version on campus, etc.
I know enough about SEO now to be dangerous, and I know this scenario is hypothetical, but in hopes of gaining more insight:
Let's look at two extremes, not too extreme, just enough to show a large gap. There's one site thats built as optimized as it can be using CSS, a well defined structure, proper content with keywords, sitemap, the whole nine yards. We'll even give it a little extra advantage as the subject matter is atypical meaning less compeition for its keywords.  The other site, has done everything wrong - little to no CSS. image buttons, no tags, navigation set up with no logic behind it, little actual text, or text reasterized into JPEGS, etc. Same topic matter.
The first site has little to no inbound links. The second site has lots and lots. And they're legit links - no directories or link submission programs - just real people who've posted link on their sites, in blogs, in emails, whereever people place a link that they think someone else would be interested in. There's a leap of faith here that so many people would be interested in such a bad site, that in reality people would hate to look at it much less gain any benefir from it.
So then, using the same keywork searches, which site will rank higher? Will the second site cause the crawlers to be so confused that they just couldn't rank it, or is there some threshold with inbound links that puts it over the top? There has to be some connection to the keywords somewhere I know, but maybe it's only in the link itself or anchor text.
Lon
PS Ive been curious about this for some time when researching keywork results for a client and some competitors cam up higher even though the sites themselves were clearly lacking by comparison.

Personally, I have a question about backlinks natural and artificial. I heard that there are software that create hundreds of backlinks automatically. Does anyone have any evidencethere to tell me some experience good or bad using this artificial mechanism to makebacklinks? I would like to hear from everyone, it is advantageous or not. I have a blog: http://www.jocemarburei.com.br/?p=624 and I'm sweating the shirt in an attempt to generatebacklinks natural for him, but it is very laborious. I wonder if it is not harmful to my blog if I use a software to do this work, since my blog has unique content and relevant. Thank you.

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    i am working on the seo campaign for a website i have
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    "pellio" <[email protected]> wrote in
    message
    news:f2ublo$f8d$[email protected]..
    >i am working on the seo campaign for a website i have
    designed and i am
    >trying
    > to acquire relevent inbound links. iv acheived some
    success recently with
    > getting the site listed on relevant directories and
    posting informative
    > articles on relevent sites. i have been using the
    link:domain feature of
    > yahoo
    > to check how many inbound links i have but despite
    increased links to the
    > site.these results rarely change. the msn equivalent
    seems to be more up
    > to
    > date. what i was wondering is, is there a feature you
    can use on yahoo or
    > msn
    > which allows you to search for a specific link to your
    website to see if
    > that
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    Patty Ayers | Adobe Community Expert
    www.WebDevBiz.com
    Free Articles on the Business of Web Development
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    Hi, I have problems with seo in muse. This site " snapas.dk " dosent show at all in google, when searching snapas? All my pages contains the name snapas, and its added in metadata as well? What to do? Jacob

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    Den 25. mar. 2014, Vinayak_Gupta <[email protected]> skrev:
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