Easy way is...
1. My Computer
2. System Properties.
3. Advanced System Settings
4. Environment Variables
5. Second box, scroll down to "Path" and hit edit.
6. If there is no ";" at the end, add one then the next step depends on 32-bit or 64-bit.
(32-bit)(or 64-bit with 64-bit Java)7. Add C:\Program Files\Java\jre(6 or 7)\bin
(64-bit with 32-bit Java)7. Add C:\Program Files(x86)\Java\jre(6 or 7)\bin
8. Run server with "java -Xmx1024M -Xms1024M -jar craftbukkit.jar"
(optional)9. Replace "1024M" with the amount of RAM you wish to use. 2G is 2GB of ram, 1024 is 1024MB of RAM, or 1GB.