This is incorrect. This is not how applets work. Applets use classloaders (network classloaders in this case) exactly like any standalone Java application might.
JSPs have sort-of done this for years by compiling whenever the source doc is modified. Another example would be the "translets" created from XSLT stylesheets tranformations by the XSLTC.
A better example of dynamic code generation would be frameworks that implement EJB3 and read information from annotations to generate code that fits those aspect-oriented patterns.
But that's higher level. From the implementation point of view, dynamic code generation is implemented from libraries like ASM, JavaCC, cglib, etc.
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