Did some more searching, but still didn't found any other examples of this type of embedding sketches on Tumblr.

I think the header code is ok...

1. <!-- Processing.js Header -->
2. <script language='javascript' src='http://www.archive.org/download/Processing.js/processing-1.0.0.min.js'></script>
3. <script language='JavaScript'>
4. /*Swiped from https://github.com/annasob/processing-js
5. * This code searches for all the <script type="application/processing" target="canvasid">
6. * in your page and loads each script in the target canvas with the proper id.
7. * It is useful to smooth the process of adding Processing code in your page and starting
8. * the Processing.js engine.
9. */
10. if (window.addEventListener) {
11. window.addEventListener("load", function() {
12.  var scripts = document.getElementsByTagName("script");
13.  var canvasArray = Array.prototype.slice.call(document.getElementsByTagName("canvas"));
14.  var canvas;
15.  for (var i = 0, j = 0; i < scripts.length; i++) {
16.         if (scripts[i].type == "application/processing") {
17.          var src = scripts[i].getAttribute("target");
18.          if (src && src.indexOf("#") > -1) {
19.            canvas = document.getElementById(src.substr(src.indexOf("#") + 1));
20.            if (canvas) {
21.              new Processing(canvas, scripts[i].text);
22.              for (var k = 0; k< canvasArray.length; k++)
23.              {
24.                if (canvasArray[k] === canvas) {
25.                  // remove the canvas from the array so we dont override it in the else
26.                  canvasArray.splice(k,1);
27.                }
28.              }
29.            }
30.          } else {  
31.            if (canvasArray.length >= j) {
32.              new Processing(canvasArray[j], scripts[i].text);            
33.            }
34.            j++;
35.          }         
36.         }
37.  }
38. }, false);
39. }
40. </script>

But the main problem lies in what/how to post the sketch inside a Tumblr post. I've tried it as normal text or via the HTML post option. The latter does not display the text in the post (which is a somewhat good sign I guess, because the code is not seen as 'normal text'). However no sketch canvas is displayed either. I've tried the example code from the linked page.

1. <script type="application/processing" target="can010101">
2. int circX, circY;
3. void setup() {
4.   size(500, 280);
5.   fill(255);
6.   circX = width/2;
7.   circY = height/2;
8. }
9. void draw() {
10.   ellipse(circX, circY, 100, 100);
11.   circX = mouseX;
12.   circY= mouseY;
13.   if (mousePressed) fill (mouseX + mouseY);
14. }
15. </script>
16. <canvas id="can010101" width="500px" height="280px"></canvas>

But no sketch window is shown on the page.

Awesome! That's fantastically useful.

This is awesome! 
I'm trying to use a sketch with images in a data folder, can I just link to them via an external source? So when I call loadImage("http://www.mywebsite.com/1.jpg") it would be like that?

I've gotten it to work with processing sketches that don't require files in a data folder, so I'm fairly certain I have everything set up correctly. When I use my sketch with the link to the folder it crashes my tumblr. 

Do you have any suggestions?

How exactly are you trying to use that linked image?
I'm asking that because my tumblr can run code that looks like this:

1. img = loadImage("link");
2. image(img, 0, 0);

but it can not run something like this:

1. img = loadImage("link");
2. background(img);

I've done a Tumblr Page with a processingJs tool to test your code and fast format it to put in a tumblr post:

Hey, i m trying to do the same, but unable to. Embedding exactly as described. I feel the problem, is that' putting into one line'. Like i did that too, in the 'text' right? Here's a picture.

Don't know, but you could try...
1. removing the hard return before </script>
2. placing this line at the end instead of at the beginning: <canvas id="can010101" width="500px" height="280px"></canvas>

Nope. Still Nothing :(   There's this empty space there. 
http://thisloopinbrain.tumblr.com/

It sure can not run:

Hey it worked! thanks!