Competition in a Small Niche

I made Little Fighters 2.5 a little over a year ago, as a standalone compilation of different modifications of LF2, a popular freeware fighting game. The reason I made it was actually to have some fun in computer class (LF2 itself was starting to get boring), but it's become much more popular than I dared imagine, with over 60,000 downloads at last count. I've profitted from it as well, making a bit of money off Google ads.

However, competition has arrived in the form of Little Fighter CE, a modification with the same premise as my own. It has become rather popular among the LF2 community.

Now I am faced with several choices:

1. Ignore it. After all, I have superior marketing (for now at least), and besides, I haven't edited LF2.5 for a year - I've probably forgotten how to do it after all this time.
2. Release a new version of LF2.5. Hey, I have some free time. And there''s plenty of content I can add.
3. Combine LF2.5 and CE into one game. The original LF2.5 is simply a combination of several mods. All CE is is one big mod. So the logical next step would be to literally absorb the competition. It's perfectly legal as well.

I'm working on a lot of things right now (my fledgling web network, the Prestosoft site, AP summer work, math), but if I have time I might try releasing a new version of LF2.5!