ghell...sorry to be a pain...but you actually need to use the CLASSPATH variable...and it should at the least contain the following value ".;"

classpath

Yeah, a dot and a semi-colon....why you might ask?...here is a simple answer.

The dot instructs the javac command to look for class definitions in the same directory of your file...before looking else where (JAVA_HOME). This means that if you have packages in your project...javac won't have problems compiling your files because it will start looking there first...and obviously...speed up the whole process of compilations.

Therefore...I would recommend the following setup

JAVA_HOME=C:\Program Files\Java\jdk1.6.0_01;
PATH=%JAVA_HOME%\bin;%PATH%;
CLASS_PATH=.;

PATH and CLASSPATH

This section explains how to use the PATH and CLASSPATH environment variables on Microsoft Windows, Solaris, and Linux. Consult the installation instructions included with your installation of the Java Development Kit (JDK) software bundle for current information.

After installing the software, the JDK directory will have the structure shown below.

The bin directory contains both the compiler and the launcher.
Update the PATH Variable (Microsoft Windows NT/2000/XP)
You can run Java applications just fine without setting the PATH variable. Or, you can optionally set it as a convenience.

Set the PATH variable if you want to be able to conveniently run the executables (javac.exe, java.exe, javadoc.exe, and so on) from any directory without having to type the full path of the command. If you do not set the PATH variable, you need to specify the full path to the executable every time you run it, such as:

C:\Program Files\Java\jdk1.6.0\bin\javac MyClass.java

Note: It is useful to set the PATH permanently so it will persist after rebooting. To set it permanently, add the full path of the jdk1.6.0 bin directory to the PATH variable. Set the PATH as follows.

To make a permanent change to the CLASSPATH variable, use the System icon in the Control Panel. The precise procedure varies depending on the version of Windows.

The PATH can be a series of directories separated by semicolons (;). Microsoft Windows looks for programs in the PATH directories in order, from left to right. You should have only one bin directory for the JDK in the path at a time (those following the first are ignored), so if one is already present, you can update that particular entry.

Update the PATH Variable (Solaris and Linux)
You can run the JDK just fine without setting the PATH variable, or you can optionally set it as a convenience. However, you should set the path variable if you want to be able to run the executables (javac, java, javadoc, and so on) from any directory without having to type the full path of the command. If you do not set the PATH variable, you need to specify the full path to the executable every time you run it, such as:

% /usr/local/jdk1.6.0/bin/javac MyClass.java

To find out if the path is properly set, execute:

% java -version

This will print the version of the java tool, if it can find it. If the version is old or you get the error java: Command not found, then the path is not properly set.

To set the path permanently, set the path in your startup file.

For C shell (csh), edit the startup file (~/.cshrc):

set path=(/usr/local/jdk1.6.0/bin )

For bash, edit the startup file (~/.bashrc):

PATH=/usr/local/jdk1.6.0/bin:
export PATH

For ksh, the startup file is named by the environment variable, ENV. To set the path:

PATH=/usr/local/jdk1.6.0/bin:
export PATH

For sh, edit the profile file (~/.profile):

PATH=/usr/local/jdk1.6.0/bin:
export PATH

Then load the startup file and verify that the path is set by repeating the java command:

For C shell (csh):

% source ~/.cshrc
% java -version

For ksh, bash, or sh:

% . /.profile
% java -version

Checking the CLASSPATH variable (All platforms)
The CLASSPATH variable is one way to tell applications, including the JDK tools, where to look for user classes. (Classes that are part of the JRE, JDK platform, and extensions should be defined through other means, such as the bootstrap class path or the extensions directory.)

The preferred way to specify the class path is by using the -cp command line switch. This allows the CLASSPATH to be set individually for each application without affecting other applications. Setting the CLASSPATH can be tricky and should be performed with care.

The default value of the class path is ".", meaning that only the current directory is searched. Specifying either the CLASSPATH variable or the -cp command line switch overrides this value.

To check whether CLASSPATH is set on Microsoft Windows NT/2000/XP, execute the following:

C:> echo %CLASSPATH%

On Solaris or Linux, execute the following:

% echo $CLASSPATH

If CLASSPATH is not set you will get a CLASSPATH: Undefined variable error (Solaris or Linux) or simply %CLASSPATH% (Microsoft Windows NT/2000/XP).

To modify the CLASSPATH, use the same procedure you used for the PATH variable.

Class path wildcards allow you to include an entire directory of .jar files in the class path without explicitly naming them individually. For more information, including an explanation of class path wildcards, and a detailed description on how to clean up the CLASSPATH environment variable, see the Setting the Class Path technical note.