Where would we be without Undine? If the Hard SoM ROM-hack is anything to go by (which I am currently playing), absolutely nowhere.
Um, anyway. I would go with method #2 myself, though it's probably not a popular opinion. The great thing about video game OSTs is that by the very nature of releasing the soundtrack separately from the game, the music is no longer intrinsically linked, thus there is no obligation for track titles to remain consistent with their in-game usage. It's just a separate album of music, in my eyes, though that's probably another unpopular opinion.
I've always been interested in the song titles for this soundtrack though. I've seen numerous different interpretations and never really knew what's what. Glad to see this thread clearing it up.