Option 1.
Very often the "requirements" by the graduate division are unknown to, or even completely ignored by the department. I encountered this many times through my own experience and talking to others. I say this to allay fears that you will be punished for this action. I agree with Takeruk that you should add an explanation to the transcripts. If there is no feature where you can add annotation, I would recommend that you add a page to the pdf scan of your transcripts and explain the situation about your grades.