I tried the following with our 6u10 latest nightly build:

Enable java console.

In IE, go to:

http://javaweb.sfbay.sun.com/~ngthomas/bug/HelloWorld.html

which loads a simple HelloWorld applet.

Now in the same page, click the "Now run this applet" link.

Which will load setProperty.html

this html page sets: <param name="java_arguments" value="-Djnlp.foo=true">

But you can see in the console, jnlp.foo is not set.

BUG: plugin should relaunch applet with the java system property set

But now if you close all the browser, and go to http://javaweb.sfbay.sun.com/~ngthomas/bug/setProperty.html directly, the jnlp.foo will be set.