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Classes are introduced into the Java environment when they are referenced by name in a class that is already running. There is a bit of magic that goes on to get the first class running (which is why you have to declare the main() method as static, taking a string array as an argument), but once that class is running, future attempts at loading classes are done by the class loader.
At its simplest, a class loader creates a flat name space of class bodies that are referenced by a string name. The method definition is:
Class r = loadClass(String className, boolean resolveIt);
The variable className contains a string that is understood by the class loader and is used to uniquely identify a class implementation. The variable resolveIt is a flag to tell the class loader that classes referenced by this class name should be resolved (that is, any referenced class should be loaded as well).
All Java virtual machines include one class loader that is embedded in the virtual machine. This embedded loader is called the primordial class loader. It is somewhat special because the virtual machine assumes that it has access to a repository of trusted classes which can be run by the VM without verification.
The primordial class loader implements the default implementation of loadClass(). Thus, this code understands that the class name java.lang.Object is stored in a file with the prefix java/lang/Object.class somewhere in the class path. This code also implements both class path searching and looking into zip files for classes. The really cool thing about the way this is designed is that Java can change its class storage model simply by changing the set of functions that implements the class loader.
Digging around in the guts of the Java virtual machine, you will discover that the primordial class loader is implemented primarily in the functions FindClassFromClass and ResolveClass.
So when are classes loaded? There are exactly two cases: when the new bytecode is executed (for example, FooClass f = new FooClass();) and when the bytecodes make a static reference to a class (for example, System.out).
The Java virtual machine has hooks in it to allow a user-defined class loader to be used in place of the primordial one. Furthermore, since the user class loader gets first crack at the class name, the user is able to implement any number of interesting class repositories, not the least of which is HTTP servers -- which got Java off the ground in the first place.
There is a cost, however, because the class loader is so powerful (for example, it can replace java.lang.Object with its own version), Java classes like applets are not allowed to instantiate their own loaders. (This is enforced by the class loader, by the way.) This column will not be useful if you are trying to do this stuff with an applet, only with an application running from the trusted class repository (such as local files).