As far as I know, Windows doesn’t use the PATH variable too much. It might use it in the case of the command-line, but it usually seems to refer to the Registry.
For example, see http://filext.com/faq/broken_exe_association.php, which talks about how Windows figures out what to do with .exe(!!) files. (Nothing special about that page; it’s just the first thing that I “Googled...”)
Windows, unfortunately, is a rather Byzantine system, and this is a classic example of why. Even though it follows familiar Unix-like standards in many ways, the Registry is its Achilles heel.