I believe the hydrogen bomb went off and caused the alternative timeline..
but the other timeline carried on as usual (despite the time jump which took the Losties back to the present day)..
This is the only way the island could have been under water in the alt and backs up bens dad comment about 'i wonder what it would have been like if we had stayed on that Island' as it happened just after the days of Dharma.
The finale also backs this up with how when the electromagnetic energy was released the island started to sink, as Daniel said the hydrogen bomb would destroy this energy (resulting in the island to sink).
Finally both time lines finally merge together, as the characters have memories from the other timeline which they all eventually died on (however we do not get to see this)
This theory is also backed up by the deleted S5 footage with Daniel Faraday talking about a river and if an object is dropped in it... (im sure it was posted on the homepage a month or two back if you want to find it)
Feel free to ask any questions, personally i feel this is the only theory that doesn't have any flaws :)