Using jre 1.4.2 from plugin2 with IE on Windows XP the proxy.pac file is ignored and DIRECT connection is used to load applets
The logging/tracing in java console, when using 1.4.2, does not show anything about proxy in network details, only download of jar files (when used in tests)
A network protocol analyzer do not show any packet between local ip and proxy ip

The failure has been verified with the following configurations 
- XPsp3 and IE7 with 6u13 and 1.4.2_20 (and 1.5.0_18)
- XPsp2 and IE6 with 6u13 and 1.4.2_20 (and 1.5.0_18) 

The proxy.pac works (no switch to DIRECT) when
- plugin2 uses java 6  (APPLET tag with/without java_version param)
- only java 1.4.2 is installed (with OBJECT��APPLET+java_version��deployJava.js)
I can see proxy in network lines of java6 log and packets in network protocol analyzer

To test applets download I've used a direct internet connection with proxy.pac, with/without vpn
 
I've configured file://d:/Sun/Java/Test/Plugin2/proxy.pac in browser and java control panel (also tested browser settings) with java cache disabled, and IE cache empty

function FindProxyForURL(url, host)
 {
  return "PROXY webcache.holland.sun.com:8080";
 }

I've used OBJECT tag with clsid or APPLET tag with the new param 'java_version' 

<object classid="clsid:CAFEEFAC-0014-0002-0020-ABCDEFFEDCBA"
codebase="http://java.sun.com/products/plugin/autodl/jinstall-1_4_2-windows-i586.cab#Version=1,4,2,0"
height="60" width="440"> 
<param name="code" value="JavaVersionDisplayApplet.class"> 
<param name="codebase" value="http://www.javatester.org"> 
<param name="type" value="application/x-java-applet;jpi-version=1.4.2">
No Java 2 SDK, Standard Edition v 1.4.2 support for APPLET!!
</object>

or

<applet
alt="Applet from www.javatester.org"
codebase="http://www.javatester.org"
code="JavaVersionDisplayApplet.class" 
height="60" hspace="22" width="440"> 
<param name="java_version" value="1.4.2_20">
<!-- param name="separate_jvm" value="true" -->
</applet>