I'm not familiar with applets. But if you need to make an absolute path to it, you should place it in the module creating the form and use drupal_get_path
.
In code this would look like this:
$path = drupal_get_path('module', 'MODULE_NAME');
$form['applet'] = array(
'#prefix' => '<div>',
'#markup' => '<p align=center>
<applet codebase="'$path'" code="Clock.class" width=170 height=150>
</applet>
</p>',
'#suffix' => '</div>',
);
Using the above code, you need to place the applet in the root of your custom module. You could also make a subfolder for you applet and place it there if you like. The latter is the most drupal way of doing it, but I tend to only create subfolders if I more than 3-5 files in a module.