This a Java program that can be embedded in a Web page. The difference between a standard Java application and a Java applet is that an applet can't access system resources on the local computer. System files and serial devices (modems, printers, scanners, etc.) cannot be called or used by the applet.
This is for security reasons -- nobody wants their system wiped out by a malicious applet on some wacko's Web site. Applets have helped make the Web more dynamic and entertaining and have given a helpful boost to the Java programming language.