G'day
Think of the headings as a collapsible outline, with sections and sub-sections, each with a heading of the *appropriate* level.
Collapse it (as one can do in Word for instance) and you should see an outline made up of headings that makes sense. Each h2 belongs to a sub-section of the main h1. Each h3 belongs to a sub-sub-section under the h2. And so on. You can have multiple h2's each with multiple h3's etc.
That means... Your second version.
Regards -- Bert Doorn, Better Web Design http://www.betterwebdesign.com.au/ Fast-loading, user-friendly websites
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