Using WSAD 5.1.2 on Windows XP. I create simple Dynamic web project with one Java class (that compiles cleanly) and one JSP (that doesn't). The JSP has scriplet for the Java class and the Project Preferences as well as Window Preferences are both set for 1.4 Compliance.
If I change either Project Preference or Window > Preferences to use 1.3 JDK Compliance or use 1.4 but set Generated .class files compatibility to 1.3 then the JSP compiles cleanly.
Yes, I did have a 1.3.1 JDK in my PATH environment variable, but then I created a JAVA_HOME to the IBM WSAD/Eclipse Java directory and prepended that to the PATH env variable and restarted machine.