Perhaps you are confusing the path  environment variable (which is used to find
executable binaries) and the CLASSPATH
environment variable (which is used by Java to find .class files).

To be able to execute the Java binaries, you must add the path to the binaries
to the path. For example, on my system I
would do:

set PATH=%PATH%;G:\jdk1.3.1\bin

Of course you will probably want to make this permanent.