This question is about environment variables for developers not for general users..
The "path" in java means the absolute path to the folder where java.exe or javac.exe lies, and the "classpath" is totally different from this, meaning that it is the absolute pass to the folder (or .jar file) where the compiled .class files lie.
On windows you can set those variables ((class)passes) at
controlpanel->System->Advanced->environmentvariables
as you say.
i) Add ";C:\<path to the folder where java.exe and/or javac.exe are placed>;"
to the PATH
ii) Create CLASSPATH and add ".;C:\<path to the folder or .jar file where .class files are placed>"
without quotation marks.
(The following may seem to be complicated, and you may igonore it.
http://java.sun.com/j2se/1.4.2/docs/tooldocs/windows/classpath.html
)