The PATH variable contains directories where binary files (e.g. EXE files in Windows) will be looked for. If you open a command prompt and type "javac", you're supposed to have the "bin" directory of your sdk into the PATH, otherwise you'll get an infamous "Command not found" error message.
The CLASSPATH contains directories (or JAR files), from where your java compiler/runtime will look for .class files (and some others). For example, "java Hello.class" will not work unless you set the directory (or JAR file) Hello.class is in, into your CLASSPATH.