Applets are small Java programs that run in web browsers. They are classified as local or remote based on where they are stored and executed. The applet lifecycle consists of init(), start(), stop(), and destroy() methods that are automatically called during execution. Applets differ from applications in that they are event-driven, run in a browser, and cannot access local files. The HTML <applet> tag is used to embed applets on web pages and supports attributes like code, width, height, and <param> tags for arguments.