After reading Java 7 Update 21 Security Improvements in Detail mention..
With the introduced changes it is most likely that no end-user is able to run your application when they are either self-signed or unsigned.
..I was wondering how this would go for loose class files - the 'simplest' applets of all.
Your security settings have blocked a local application from running
That is the dialog seen for an applet consisting of loose class files being loaded off the local file system when the JRE is set to the default 'High' security setting.
Note that a slight quirk of the JRE only produced that on point 3 of.
If you load the simple applet (loose class file) seen at this resizable applet demo off the internet - which boasts an applet
element of:
<applet
code="PlafChanger.class"
codebase="."
alt="Pluggable Look'n'Feel Changer appears here if Java is enabled"
width='100%'
height='250'>
<p>Pluggable Look'n'Feel Changer appears here in a Java capable browser.</p>
</applet>
It also seems to load successfully. Implying that:-
Applets loaded from the local file system are now subject to a stricter security sandbox than those loaded from the internet or a local server.
As of Java 7 update 51.