Sorry Jim, but your #1 makes no sense. If the stem won't go through the locknut, it won't go into the steer tube, either.

On my French bikes, a standard 22.2mm stem will go through the headset locknut. Both are Stronglights, a Competition and an A-9. That means that the "ledge" left after sanding the stem is hidden. The stem goes all the way down until the ledge hits the top of the steer tube. I keep a clean line while sanding by using duct tape. I can sand a stem down fairly quickly, but I use power tools.