This is what McConnell says in his must-read book Code Complete 2:
Ideally, declare and define each variable close to where it’s used. A declaration establishes a variable’s type. A definition assigns the variable a specific value. In languages that support it, such as C++ and Java, variables should be declared and defined close to where they are first used.
He also recommends keeping variables alive for as short a time as possible, and to minimize scope.
The important thing for me is following naming conventions (Sun's Java Code Conventions are widely used). As for where are they first declared, I'd delay the declaration as much as possible for performance reasons (declaring a var you might not use is kind of a waste). Unless you know in advance it is going to be used for sure, in that case you can group it with other vars to improve readability. I think that is what JCC says about it.
