Option 1 is the correct answer. The `Malabar 07-2` military exercise was indeed a five nation naval exercise held in the Bay of Bengal. The participating countries in the exercise were India, the US, Australia, Japan, and Singapore. The purpose of the exercise was to enhance coordination and interoperability among the participating navies and to promote maritime security in the region. It involved various naval drills, including anti-submarine warfare, search and rescue operations, and communication exercises.

Option 2 is incorrect, as the exercise was not specifically focused on anti-piracy operations in the Indian Ocean. Option 3 is incorrect, as Indonesia and the Philippines were not participating in the exercise. Option 4 is also incorrect, as the exercise did not involve China and it was not conducted in the Malacca Straits.