I just read a post on map100.com, where the poster explained how Google comes up with Pagerank. Here is what Google has to say about it, and they should know:
PageRank Explained
PageRank relies on the uniquely democratic nature of the web by using its vast link structure as an indicator of an individual page’s value. In essence, Google interprets a link from page A to page B as a vote, by page A, for page B. But, Google looks at more than the sheer volume of votes, or links a page receives; it also analyzes the page that casts the vote. Votes cast by pages that are themselves “important” weigh more heavily and help to make other pages “important.”
Important, high-quality sites receive a higher PageRank, which Google remembers each time it conducts a search. Of course, important pages mean nothing to you if they don’t match your query. So, Google combines PageRank with sophisticated text-matching techniques to find pages that are both important and relevant to your search. Google goes far beyond the number of times a term appears on a page and examines all aspects of the page’s content (and the content of the pages linking to it) to determine if it’s a good match for your query.
In my opinion, this is how it really works in layman’s terms:
1. An inbound link from a website that is similar in nature to your site may offer more “Google Juice”.
2. The higher the page rank of the linking site/page is, the more Google juice you get.
3. Inbound links from “Bad Neighborhoods” may take some of the beloved juice away.
4. Quantity of inbound links is not nearly as important as Quality inbound links.
This, of course is my personal theory. Anyone who claims to know how Google really calculates PR of a website is either mistaken or a Google insider.