This may be a better explanation:
When a command is issued in Command Prompt, the computer first looks in the current folder for an executable file with the same name and an extension like .exe, .com or .bat. If it doesn't find one there, it then searches in other specified folders. The folders searched, and the order in which they are searched, can be controlled by the path command. For example, the command:
this means if I type a command (one that is not a standard DOS or Command Prompt command, that is), Command Prompt will first search the root folder (that is, c:\),then the c:\windows folder, and finally the c:\tools folder until it finds an executable program with the same name as my command.
The problem is, it isn't searching those folders in the path. As a test I moved a copy of Excel.exe to the system32 directory and had the same problem.