The message says it was anable to start java applet (for drag and drop).
This is certainly due to you java version, verify it : if it is a 64 bit version, install 32 bit version because, by default, Internet Explorer is launch in 32 bit version even if you are in Windows 7 64 bits.
If you are already in java 32 bits, clear java cache and IE cache, close all IE windows and start again Windchill. It will open authorisation windows, and after that, normally it works.
Turn around if all solutions failed : in my settings/Preferences, set "Attachments/File upload mechanism" to "Use basic browser ..."