Jason, I'll play.
Given the choice, I would rather see the team that won consistently over the teams that they should have beaten. I veiw the NCAA in some degree as a reward. I would rather reward teams that were consistent, so team 2 is my choice.
Rewarding a team that gets up and plays hard at times but loses 3 games to teams out of the top 100 (if I am reading your example correctly) meaning that they must have played really below their potential (of course injuries, etc... could explain some of this and may change my opinion) is not my first choice.
However, I fully accept the other arguement as reasoniable as well.