From my experience there are no remarkable differences between the hibernate versions you mention,
neither in performance nor in memory usage.
You would indeed notice a performance increase when you switch from java1.4 runtime to java1.6 runtime.
Quote:
We're stuck using JDK 1.4.2 unfortunately and as I understand things that limits us to 3.5 as a maximum.
You must distinct between compile-time and run-time.
Problably you are bound to 1.4.2 at compile-time,
but nothing should in theory actually distract you from using a jre 1.6 at run-time,
at least a try it would be worth.