Amarnath, are you using JDK 1.3 as your compiler for IS Developer ? Have a look at the readme.txt file in the IntegrationServer root directory. It says:
When compiling with JDK 1.3, webMethods’ namespace persistence
scheme for Java services may violate the Java language rule
governing “Name Conflicts Between Types and Subpackages.” As a
result, when using JDK 1.3 to compile Java services on webMethods
Integration Server, Java services can only be created at a single
level within a folder hierarchy
For example, the following is valid:
-> Java Service1
-> Java Service2
–> Flow Service1
–> Flow Service2
However, all Java services in the FolderA hierarchy must be
directly under FolderA; no Java services may be defined within
FolderB (or all Java services must be moved to FolderB).
Note that you can successfully add a Java service to FolderB;
however, changes to services in FolderA will no longer compile.
This sounds like your problem.