There is definitely something wrong in paths with the uploaded java files, and <applet> tag.
We have created custom control with embedded Java Applet, and were able to insert (drag-and-drop) this control to a page.
Please, make sure that :
You have uploaded the Java class-files and all other Java-resource files to your project;
Written the codebase
property of <applet>
correctly. You should write as a value the full URL address to your directory where you store the java class files.
property holds a relative path
to the codebase property, so you can simply enter the class name of the java applet.
That is all we have followed, and we had no problems at all with including a control with java applet on a page.
Let us know if you need any further assistance.
the Telerik team