Security Enhancements have been introduced in 5.0u6.
See also Release Notes at http://java.sun.com/j2se/1.5.0/ReleaseNotes.html

"Prior to this update, an applet or application could specify the version of the JRE on which it would run. This has changed. All applets are executed with the latest JRE version."

However, the current policy (in 5.0u6 and 5.0u7) causes a different security problem.
Details are in the comments section.