I agree that adding or subtracting a pound of LME/DME or a gallon of water is no big deal, in the sense that you'll still make beer. Your final product will be pretty significantly different.
My brews are probably closer in strength to your first method. If you want to compare the numbers, you can use a calculator (like HopVille) to estimate what your ABV and IBUs would be with different scenarios.
In the end, it comes down to what you want to make. If you want a lower alcohol, easier drinking beer, adding a little more water won't hurt anything. If you want a stronger, thicker brew, adding water is counterproductive to this goal. No matter what you do, you have the potential to make good beer.
Also, I think you'll find a leap in quality from the pre-hopped extract to doing your own hops. I know the only pre-hopped brews I've done weren't very good, and everything since then has been great.