Ooo..... can't let this one slip by:
I use #1 and so do most (all?) of the people I work with. #2 wastes lines, especially on nested ifs!
if (test1)
{
if (test2)
{
//do something
} else
{
//do something else
}
} else
{
// do a third thing
}
Looks sooo much better as:
if (test1) {
if (test2) {
//do something
} else {
//do something else
}
} else {
// do a third thing
}
I never need my editor to line up the blocks... amazingly my eye can line up the indentations just fine.
if (isTrue()) {
// do something
}
See, the if lines up with the brace

If you really do work where the styles vary, just use
Jalopy, the java code formatter. Once you set it up, you can easily convert back and forth between styles (and not just for braces, but for all the other bad habits people have). Pick a common style (recommend Sun's conventions) and have people convert back and forth as they check it out/back in from source control. It works great and also integrates into many IDEs

I used it to clean up 1950 classes which had this as the if-else indentation style! (Used the command line version and it only took a few mins

)
if (test1) {
} else
if (test2) {
} else
if (test3) {
}
That code was generated by an IDE of all things (VisualAge for java) and there was no way to turn it off (it's a really old version of VisualAge).