Five months ago, CVE-2008-5353 and other vulnerabilities were publicly disclosed, and fixed by Sun.
CVE-2008-5353 allows malicious code to escape the Java sandbox and run arbitrary commands with the permissions of the executing user. This may result in untrusted Java applets executing arbitrary code merely by visiting a web page hosting the applet. The issue is trivially exploitable.
Unfortunately, these vulnerabilities remain in Apple's shipping JVMs, as well as Soylatte 1.0.3. As Soylatte does not provide browser plugins, the impact of the vulnerability is reduced. The recent release of OpenJDK6/Mac OS X is not affected by CVE-2008-5353.
Update 06-15-2009: Apple has released Java for Mac OS X 10.5 Update 4, which contains a fix for this issue.
To update your system, run "Software Update" from the Apple menu.
Note: Safari users should leave 'Open "safe" files after download' permanently disabled. Similarly critical vulnerabilities unrelated to Java remain in Safari's handling of "Safe" files.
Unfortunately, it seems that many Mac OS X security issues are ignored if the severity of the issue is not adequately demonstrated. Due to the fact that an exploit for this issue is available in the wild, and the vulnerability has been public knowledge for six months, I have decided to release a my own proof of concept to demonstrate the issue.
If you visit the following page, "/usr/bin/say" will be executed on your system by a Java applet, with your current user permissions. This link will execute code on your system with your current user permissions. The proof of concept runs on fully-patched PowerPC and Intel Mac OS X systems.
Thanks to Jeffrey Czerniak for bringing this issue to my attention.
Update: Julien Tinnes e-mailed with a link to his in-depth discussion regarding the vulnerability available here.