This is really strange...as your settings are in order.
do you mind trying something out for us please.
1- Navigate to C:\Program Files\Java\jdk1.6.0_07\bin inside the command prompt or MS-DOS if you like
2- Type javac and hit the return key
If you get the following output
It means that your Java installation was not successful...and you need to download a fresh copy and install from scratch.
'javac' is not recognized as an internal or external command,
operable program or batch file.
If you get something that starts with
Your Java installation is fine...and we need to look for something else that could be causing the problem.
Usage: javac <options> <source files>.....