Wrong java -version being reported
You're probably have java.exe copied over to one of system paths (AFAIK that's Java installer default behavior).
To check what actually executes when you run 'java -version' run from command line:
for %I in (java.exe) do @echo %~$PATH:I and it will tell you where it is.
The PATH folders are checked in the order they appear. Try moving the java path to the front. If that fixes the issue then you have another version somewhere on your path.
When installing a public JRE (used by the Java plugin), a java.exe file is also created in C:\WINNT\system32 (IIRC). It's probably this java command that is executed, since C:\WINNT\system32 comes before the JDK/bin directory in your PATH.
Put the JDK/bin directory at the beginning of the PATH