Hi Nathan,
Thanks for the hint. There was no issue in the CLASSPATH since I had not copied the dtd to the folder in the local machine.
As a separate component, Hibernate was not having any security issues while accessing the dtd. But when accessed through RMI, the SecurityManager was preventing it from accessing the external dtd (as the hibernate.cfg.xml is not part of the Sun
Java Package). This (the security issue) was overcome when the following entry was made in the Policy File.
grant codebase "file:/D:/PROJECTS/~/~/src/-" {
permission java.security.AllPermission; };
Some more info on the security and permissions is available at
http://java.sun.com/j2se/1.5.0/docs/guide/security/PolicyFiles.html#Examples