SOLUTION
Finally I ran across this post here (Java 7 on 32-bit Windows 7 - Java Webstart - Unable to load resource)
When adding "-Djava.net.preferIPv4Stack=true" to the runtime parameters under the Java Control Panel (java tab, view) for the current JRE, it solved the problem. I was able to restore my security setting to proper levels and was able to run the java verification tests as well asa bunch of other applets just fine.
When it cam to running jnlp files, I would still get errors unless I manually edit the jnlp file and add it to the vm args i.e.
If you want to apply this change system wide, add the _JAVA_OPTIONS environment variable and add -Djava.net.preferIPv4Stack=true to it
Regards, Shawn Recinto