Vern--
Sorry about the delay in response here. I typically only check this site once per (weekday) morning--if I have time.
Looking at it further, and looking at the other comments, there are two other things I would add.
First, law school deliberately teaches (or tries to teach, not all students learn) finding alternate interpretations of presumably clear language. This is done, in part, due to the assumption that the other guy's lawyers will do this and you need to learn it to avoid the problems that this can cause. You learn to find ambiguous language and fix it before it becomes an issue. You also learn case law about interpretations and the various rules and sources a court will use in interpreting seemingly clear statements.
This gets to be a habit--you're always looking for the other way anything can be interpreted.
But, and this leads to the second point, sometimes you forget a rule in the fun of the reinterpretation. Part of the language posted, and of the sentence in question, states, "if the Contractor or subcontractor knowingly submitted cost or pricing data that were incomplete, inaccurate, or noncurrent." Interpretation 2 basically requires that we pretend the words "that were incomplete, inaccurate, or noncurrent" were never there. If we go with interpretation 2 then those words no longer have meaning. They apply to nothing.
That cannot be, and that is a rule the courts will follow. If an interpretation requires ignoring part of the language set forth then that interpretation cannot be correct. Or so the courts hold. Put another way; if a word or phrase is put into place it must be assumed it was put there for some purpose. It cannot be interpreted out of existence.
NOTE--this is a separate situation from where there is conflicting language that requires some word, phrase, sentence, paragraph (and so on), be treated as if were not in the document.