Notepad is not an IDE (Integrated Development Environment). You'll need a program that can take a .java file and create a .class file. IDEs are covered on page 6, and tips on the different IDEs are given in Appendix A. The online version of Appendix A also includes links to buy all the software online.
You'll have to look at the documentation that came with the IDE. Unfortunately, I can't afford to buy every IDE on the market, much less all the hardware that's needed to run every possible variation.
Take a look at the CODEBASE attribute of your APPLET tag. That shows the directory where the server is expecting to find the applet (page 20).
Java has gone through several different versions (as discussed on page 7). Your IDE is letting you know that it can handle a version of Java greater than 1.0. Or, in Java jargon, it's telling you that version 1.0 has been "deprecated," i.e., there's a newer version out, which your IDE thinks you should be using.
However, the situation given in page 7 still hasn't changed in 2000. Just using the Mac as an example: Netscape 4.x doesn't support Java 1.1 fully. IE 5 (with the current version of MRJ) only supports Java 1.1, not 1.2 or 2.0. So, if you want to be cross-platform and cross-browser, you're stuck with using Java 1.0 for now.
So what to do about the warning? Basically, don't worry about it. If you want to use an older version of Java than it wants you to, well, you're a person who knows more than your software. Some IDE's let you turn this warning message off; if you can, I recommend it.
Yes, finally! You can find a link to it on the applets page, or you can download it directly from here.
Between teaching and working on my next book, I'm not taking on any consulting projects at this time. Thanks for asking, though.