rt.jar?? what is this?

you can download Xerces4J to get JAXP classes, for instance

how to set my classpath to point to my runtime?

in my system, i have already set this:

JAVA_HOME                    C:\jdk1.3.1_07
CLASSPATH                    C:\jt400\jt400.jar
CATALINA_HOME            C:\Program Files\Apache Group\Tomcat 4.1

is that i need to add this in?

CLASSPATH                     C:\jdk1.3.1_07  ??

You don't have to set your class path to your run time.. its already done when you specify JAVA_HOME parameter.
As dualsoul said above, you are missing JAXP package ( which is XML parser classes) in your system...  Go to http://xml.apache.org/xerces2-j/index.html and download xrecs to your system and try again..

Hope this helps

if you want Xerces, to be installed standalone, somewhere on your file system, just set:

CLASSPATH=C:\jt400\jt400.jar;path_to_xerces_jar_file

but, i recommend you to download and install JAXP package from java.sun.com

dualsoul, i have downloaded the files you recomanded into C:\Xerces-J-bin.2.5.0\xerces-2_5_0

and i have set my classpath to point to that folder,
CLASSPATH   =C:\Xerces-J-bin.2.5.0\xerces-2_5_0

but i am still getting the problem.

Anyway, do you think you can provide me the link for this JAXP package location in the java.sun.com?

And this is the same error i am getting when i start my Tomcat appserver in eclipse environment
Exception during startup processing
java.lang.reflect.InvocationTargetException: java.lang.NoClassDefFoundError: org/xml/sax/helpers/DefaultHandler
      at java.lang.ClassLoader.defineClass0(Native Method)
      at java.lang.ClassLoader.defineClass(Unknown Source)
      at java.security.SecureClassLoader.defineClass(Unknown Source)
      at java.net.URLClassLoader.defineClass(Unknown Source)
      at java.net.URLClassLoader.access$100(Unknown Source)
      at java.net.URLClassLoader$1.run(Unknown Source)
      at java.security.AccessController.doPrivileged(Native Method)
      at java.net.URLClassLoader.findClass(Unknown Source)
      at java.lang.ClassLoader.loadClass(Unknown Source)
      at sun.misc.Launcher$AppClassLoader.loadClass(Unknown Source)
      at java.lang.ClassLoader.loadClass(Unknown Source)
      at org.apache.catalina.loader.StandardClassLoader.loadClass(StandardClassLoader.java:941)
      at org.apache.catalina.loader.StandardClassLoader.loadClass(StandardClassLoader.java:857)
      at org.apache.catalina.loader.StandardClassLoader.loadClass(StandardClassLoader.java:941)
      at org.apache.catalina.loader.StandardClassLoader.loadClass(StandardClassLoader.java:857)
      at java.lang.ClassLoader.loadClassInternal(Unknown Source)
      at org.apache.catalina.startup.Catalina.createStartDigester(Catalina.java:280)
      at org.apache.catalina.startup.Catalina.start(Catalina.java:441)
      at org.apache.catalina.startup.Catalina.execute(Catalina.java:400)
      at org.apache.catalina.startup.Catalina.process(Catalina.java:180)
      at java.lang.reflect.Method.invoke(Native Method)
      at org.apache.catalina.startup.Bootstrap.main(Bootstrap.java:203)

But when I start my appserver OUTSIDE the eclipse, things are working just fine......

>CLASSPATH   =C:\Xerces-J-bin.2.5.0\xerces-2_5_0
you should point classpath to .jar files, which contain classes you need, not directory
use some zip tool to view contens of .jar files, and find which contains org/xml/sax/helpers/DefaultHandler
or even better, include all .jar from your Xerces:

CLASSPATH   =C:\Xerces-J-bin.2.5.0\xerces-2_5_0\lib\some.jar;C:\Xerces-J-bin.2.5.0\xerces-2_5_0\lib\some2.jar
and so on...

Start search JAXP from here:
http://java.sun.com/xml/jaxp/index.html

>But when I start my appserver OUTSIDE the eclipse, things are working just fine......

hm...may be eclipse ignore system CLASSPATH setting, and use it's own.
Try to search, where to set up CLASSPATH in Eclipse

OK....