It is my belief we are in option two, but to be honest if we were told "much of what you saw in the beginning of season 4 never happened" then I'd be okay with that.

Regardless of what we are told, Peter Bishop is the central character of this show. We revolve around him. He is the source and reason for fringe events and we get his father to act as Johnny Explainer and Olivia to act as our love interest. With that in mind we accept everything that happens to the characters around him.

edit: I am extremely tired, and my thoughts on this are not flushed.