CLASSPATH problems

I am a beginner and I am having classpath problems! Here is where my files are located:

C:\Users\msm\Documents\Java_II_projects\HorseDA\Horses

My package statement in my 3 pgms is: package Horses;

What should my CLASSPATH variable be set to?

Right now, my project will only compile if I take the package statements out of my 3 pgms. If I leave the package statements in, I get all sorts of compile errors stating that this or that could not be found. Should all 3 java files and all 3 class files be in the same folder, or should the java files be in one folder and the class files be in a sub-folder? THANKS for your help!