Ok, so I found simple "always there" commands weren't working, such as ping or ipconfig. When trying to launch ipconfig from the command line I would get: 'ipconfig' is not recognized as an internal or external command, operable program or batch file. (You can see it in the screenshot of my Command Prompt below.)
I did an echo %PATH% and observed that %SystemRoot% was not being evaluated. You can see from the screenshot below instead of showing "C:\WINDOWS" it was showing %SystemRoot% (I've highlighted them in red.) This is the state the computer shipped from Dell with a purchased copy of XP Pro installed so this situation is going to affect a LOT of users. Of course, maybe most Dell customers don't use the command line.
Scroll down to see the screenshot... argh these blogspot templates suck at handling wide images.
Here's a screenshot of the error, and the faulty path lookup in action.
So my immediate thought was that %SystemRoot% hadn't been setup in the Windows Environment Variables. However, bringing up the dialog showed me that it was:
Anyway, the solution is just to kick Windows XP into re-evaluating the %Path% variable. The entries were all there, but somehow Windows has cached an invalid lookup for it. The easiest way I believe to do this is to go into the environment variables. Just click edit, you don't even have to change anything, and then click OK.
Now your old command prompt if it is open won't be updated, but if you open a new one, everything should work as you expected.