As a part of diagnostic effort we copied cmd.exe from system32 folder of windows to C:\\ drive and tried to run from an applet and get following exception :
java.io.IOException: Cannot run program "cmd.exe": CreateProcess error=5, Access is denied
The problem is with JRE 1.7 whereas on JRE 1.6 it runs fine.
Renamed it to cmdx , runs fine.
So any program named as cmd does not run at all.
The applet jar is signed.