The latter. It's been a while since I've seen the English dub, but the Japanese version explicitly refers to him as a regenerated Frankenstein. He's even said a few times to be Caucasian/white, i.e. of German heritage (despite being played by an obvious Japanese actor), and there many references to him as being the regenerated original Frankenstein, especially when Kawaji speaks to Dr. Liesendorf. Liesendorf even explains that this isn't the first time Frankenstein has regrown from just his heart - it apparently happened many times before.
He *IS* initially assumed to be a war orphan, but this is prior to Kawai (the retired naval officer) telling the doctors about the heart. After this, the theory that the boy is a war orphan is quickly abandoned. I, too, heard about the whole "he ate the heart" thing, but I'm uncertain whence it came, because it isn't in the original Japanese version.
"I mean, really, how many times will you look under Jabba's manboobs?"
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