I chose #2, although it depends on the game and the group.
For D&D 4e, which I run most often these days, a battlemat and miniatures are necessary. Also, even without minis, a battlemat is useful for drawing diagrams, puzzles, notes, and getting people a better sense of the space their characters are in.
For other systems, I've had us just sit around in the living room while we played, and this has been fun. Still, I tend to prefer being around the gaming table, as people are closer together and it's easier to pass notes quickly around the table, for people to confer without getting up, and the like. Also, I find that people tend to relax more in the living room environment, which can lead to fun roleplaying, but can also lead to inattention, weaker description of what their characters are doing, and the like. Also, people tend to snack more in this environment, which can be a distraction from the gamme.