It is using the %systemroot% variable, and when I do a start->run->cmd %systemroot% it does bring up c:\windows like it should. In my autoexec.bat it is appending one line to the path.

Are you sure the autoexec.bat is run when you open a command box? Or only when the system is started in DOS mode (does such a thing still exists in XP ?)

Hrmm... as I am messing with this my path gets reset every time I either open or close the command window. If I set the path it all works... but reopen the window and the old path statement is back.

Same behaviour in W2K, Linux terminal etc. Each time you open a command line session, the system starts with the defaults. Once leaving this session (e.g. with 'Exit') the local changes are lost.

You can try this by
1 opening a command box
2 check the Path
3 start a new child process ("command.exe") by typing that command on the prompt.
4 The path will be inherited from the previous process. You can change it here.
5 Leave this child session againg ("Exit")
6 Check the Path, it should be in the original state before your change.