OK, here's what I've just tried (Windows XP SP2, SQL Server 2008 SP1 CU4).

- In Computer Properties, add a system environment variable called Test, value Test

- xp_cmdshell 'set' Result - new variable did not appear in result set

- Restart SQL Server

- xp_cmdshell 'set' Result - new variable appeared in result set

- In Computer Properties, change value of Test variable to Test1

- xp_cmdshell 'set' Result - variable still appeared with old value (Test)

- Restart SQL Server

- xp_cmdshell 'set' Result - variable appeared with new value (Test1)

- In Computer Properties, delete Test variable

- xp_cmdshell 'set' Result - variable still appears, with value Test1

- Restart SQL Server

- xp_cmdshell 'set' Result - Test variable no longer appears

Like Brandie, I avoid environment variables and use configuration files where possible.

John