Global Variables and PICC compiler

I use HITECH PICC to compile my C code. It doesn't like it when I declare variables inside functions, but seems to be merry ONLY if they are global.

Am I missing something here?

I do not use the program/compiler, however, being it is a microcontroller and not using an OS and tons of RAM, that is how I expect it to work (and I would write my code that way if I used it).

Maybe it pulls all the source in rather have object files and linking them. And no OS to deal with.

Yeah, you aren't programming for a PC. The stuff you can do is limited compared to that.