Some ideas:
Instead of the panicky “Security Warning”, it would be much better if it read something like “Your approval is needed”. My virus checker/firewall is giving me “Security Warning”-s, the least what i want is some applet to show me a window with similar text to what a virus checker is showing. The message should be positive.
There is a slight difference when the browser reports that it needs to download and install a plugin to run the web-page, than the page trying to install something “by itself” and showing some scary “security warning”. Maybe tighter integration of applet/webstart system with the browser would help this issue. The browser could manage the installed libs and cached applets/webstart apps. So Java would not show the security dialog, but the browser would. Its the matter of making an API and writing browser-specific plugins.