If you make the applet too large then you will notice a blank strip appear at the bottom of it as the waves lap backwards and forwards. Positioning the horizon On an artistic note, it is not a good idea to use an image that already has a horizon. If you look across the surface of a lake you will not see the horizon reflected in the surface. There is no problem using transparent GIFs for the overlay parameter - in fact this is recommended. You can usually tell if a transparent GIF has been used because the top half of the applet will have parts which appear to be upside down.
Some web browsers have trouble opening applets straight from a hard disk.
I have noticed this happen with Internet Explorer 3 and Netscape 4. Class files are binary files, just like image files are. You should transfer them in the same way that you transfer image files. This is a very common problem. Your transfer program has changed the name.